APPENDIX 18
Memorandum submited by Fibrowatt Limited
Fibrowatt would be most grateful if
you could consider the following points in your investigation.
In summary, we argue that the supply of renewable electricity
should be exempt from the Climate Change Levy because:
a Climate Change Levy on all electricity supplies
will reduce the demand for open market renewable electricity,
will damage the commercial prospects of existing renewable generators
and will hamper the development of renewable capacity outside
the Non-Fossil Fuel Obligation (NFFO);
under current and future trading arrangements,
it is possible to identify the supplies from a renewable generator
to users of electricity; and
an exemption from the Climate Change Levy for
renewable electricity supplied to industrial and commercial users
would increase the demand for renewable electricity relative to
the demand for electricity from other fuel sources.
1. The effects on open market demand for renewable
energy (Section 15.1, Climate Change Levy consultation document)
If renewables are not exempt, we believe that
the proposed levy will reduce the demand for, and generation of,
green electricity. In contrast, the Government has concluded ``that
a downstream levy would effectively be neutral towards renewables
used to generate electricity in that there would be no tax induced
reason in the short term to vary the amount of electricity generated
from renewable energy''.
There is a significant group of renewable generators
(approximately 120 sites with a combined capacity of 325 MW DNC
in England and Wales) who survive because electricity suppliers
can sell their ``green'' output to their customers at preferential
rates, often because a customer wants to use the public relations
advantage of contributing positively to the environment. The demand
for this open market renewable electricity will undoubtedly be
affected by the imposition of a Climate Change Levy.
An industrial or commercial user of electricity
who, under normal conditions, might wish to buy a percentage of
his electricity at a premium from renewable resources to fulfil
his environmental objectives, could instead argue that he is directly
contributing to UK emission targets through an industry-specific
Climate Change Levy. Current renewable capacity is kept in operation
by premium prices. Generators would lose this premium if customers
felt no compulsion to pay extra for green electricity.
This could result in the closure of existing
renewable power stations. An independent survey commissioned from
the accountants Dixon Wilson by the Renewable Generators' Consortium
in 1998 concluded that many of the NFFO 1&2 stations are currently
selling their output at prices close to their break-even requirements
and that marginal decreases in income could cause them to close.
Companies involved in developing open market renewable capacity
outside NFFO will also be affected.
Consequently, we believe that a Climate Change
Levy on all electricity supplies will reduce the demand for open
market renewable electricity, will damage the commercial prospects
of existing renewable generators and will hamper the development
of renewable capacity outside the Non-Fossil Fuel Obligation (NFFO).
2. The ways in which energy suppliers can demonstrate
that they supply from small-scale renewable generators (Section
15, Climate Change Levy consultation document)
It would be a mistake to suggest, as the Climate
Change Levy consultation seems to, that some electricity sales
cannot be identified. Like many market, the electricity market
is a paper market, where physical inputs and outputs are netted
off against each other. For example, the pound that I withdraw
from my bank in Nottingham is treated as the same pound that I
paid into my bank in London. Contractual links between generators,
suppliers and customers form the basis of the electricity market.
There are a number of supply companies who currently
sell renewable electricity to industrial and commercial users
at a premium. For example, one of our power stations in Yorkshire,
which is fuelled by poultry litter, currently sells all its output,
under a Yorkshire Electricity green tariff, to domestic consumers.
These tariffs are approved by OFFER and soon to be endorsed by
a DTI sponsored accreditation system to be run by the Energy Savings
Trust (EST). The Review of Electricity Trading Arrangements (RETA)
process, with its emphasis on bilateral trading, is expected to
encourage such practices. Suppliers use a variety of methods to
demonstrate their contractual links to generators. Customers who
buy renewable electricity products accept these arrangements.
3. Whether any further incentives could be given
through the proposed structure of the Climate Change Levy that
would increase the proportion of electricity generated from renewable
energy sources (Section 15.2, Climate Change Levy consultation
document)
If the supply of renewable electricity were
exempt from a Climate Change Levy, it would increase the demand
for electricity generated from renewable energy sources. We would
be against a system whereby the supply was not exempt, but the
supply companies or an agency would pass the levy raised to the
renewable generators. Although this would mean that the full 0.6p/kWh
(the illustrative figure in section 6.3) could be immediately
available to generators, in the longer term, for reasons identified
above (in paragraph 1), we think that the existence of a Climate
Change Levy on renewable supplies would adversely affect the development
of the market.
Finally, please note that the Government's Advisory
Committee on Business in the Environment (ACBE) last year suggested
that companies make individual voluntary percentage commitments
to renewable electricity supplies. If renewable electricity supplies
were to be excluded from a Climate Change Levy, we suggest that
exemptions should apply both to companies being totally supplied
by renewable electricity and those buying a percentage of their
requirements.
June 1999
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