Select Committee on Trade and Industry Minutes of Evidence


Memorandum by the Electricity Association

  1.  The Electricity Association (EA) is the trade association for the UK's major electricity generation, transmission, distribution and supply companies. EA represents the UK industry at both a national and international level.

SUMMARY

  2.  Diversity of fuels and supply sources are the key to achieving security of supply. Free trade and liberalised energy markets can play an important role in achieving fuel diversity.

  3.  EA recognises that market mechanisms may not always be sufficient to deliver policy goals and that intervention is sometimes necessary. However, the industry has longer-term investment horizons than many other sectors, and there is therefore a need for greater clarity and transparency in the policy and regulatory framework.

  4.  A balance must be struck between environmental policy and supply security to ensure that fossil fuels, nuclear power and renewables are all able to contribute to fuel diversity.

  5.  There is considerable scope for energy conservation and the UK electricity companies are playing a positive role. Efforts to conserve energy should focus more heavily on the transport sector, where the issue has yet to be fully addressed.

  6.  New energy efficiency measures should seek to minimise competitive disadvantage to the UK economy. Electricity companies are playing an active role in combating fuel poverty, but cannot solve the problem on their own. Collaboration with other stakeholders and a range of Government initiatives is required.

  7.  Greater consistency is needed between Government departments in the implementation on energy policy, with a concerted effort being made to reconcile conflicts between competitiveness, security and environmental objectives.

  8.  It may be desirable for Government to charge one specific department with responsibility for overseeing and co-ordinating energy policy, or possibly to establish a specific body with this remit. Energy policy should also be subject to periodic review at the highest levels of Government.

QUESTIONS

Given the imminent dependence of the UK on energy imports, how can the UK maintain a secure energy supply? What mix of fuels would maximise security?

  9.  EA believes that the key to security of supply is diversity of fuels and supply sources. Free trade and liberalised markets, both inside and outside the EU can play an important role in achieving this diversity. The main threats to security of supply are political disruption and politically based restrictions on fuel sources, rather than a shortage of resources. EA does not support a prescriptive framework policy for energy imports; this would be likely to undermine trade and distort the energy market.

  10.  EA does not believe that import dependency, per se, represents a problem, as many other commodities are imported. The UK electricity sector currently has a well-balanced fuel mix, but it is recognised that if current trends continue, gas is likely to dominate by 2020. This will raise concerns about fuel diversity. However, the Government should keep options open rather than attempt to direct a precise target fuel mix. As imported gas will increasingly have to be transported to the UK over long distances, it is particular important that progress is made towards liberalising the continental gas market.

  11.  Fuel diversity is not the only factor in ensuring security of supply—electricity and gas networks also have a crucial role to play. In the past, price caps and the RPI-X mechanism have provided effective incentives to maximise cost efficiency in the network businesses. In the longer term, the regulatory framework needs to encourage continuing investment in an infrastructure that is sufficiently robust to maintain acceptable levels of reliability. The regulatory system should also delivery an appropriate balance between economic, environmental and security objectives in the light of the likely changes in network systems and their operation.

IS THERE A CONFLICT BETWEEN SECURITY OF SUPPLY AND ENVIRONMENTAL POLICY? WHAT IS THE ROLE FOR RENEWABLES AND COMBINED HEAT AND POWER SCHEMES?

  12.  Environmental policy can impinge on supply security and it is important that a balance is struck between the two objectives. Coal, for example, can play an important role in fuel diversity, but its future as a generation fuel is threatened by EU environmental measures. The Large Combustion Plant Directive and National Emission Ceiling Directives will inevitably result in the early closure of some UK coal fired plant and the UK should certainly not take action to implement the targets ahead of time.

  13.  EA believes that nuclear generation is a key component in energy diversity and nuclear power stations have an excellent safety record and are making a major contribution to reducing CO2 emissions. Options for nuclear power should therefore be kept open.

  14.  With regard to renewables and CHP, EA supports their increasing use, both as a response to climate change and as a means of increasing energy diversity and overall security. The proposed renewable obligation is a good example of how intervention to achieve a particular policy objective can be managed by a market-based approach. EA welcomes the approach taken by the Government to establish the first tranche of offshore wind farms.

WHAT SCOPE IS THERE FOR FUTURE ENERGY CONSERVATION?

  15.  In the UK, there is less long term financial commitment to reducing energy consumption than to ensuring that the country has an increasing proportion of environmentally benign generators. Scope for energy conservation is considerable. EA supports efforts to reduce UK energy demand, including improved building regulations and appliance standards. EA proposed during the Climate Change Levy (CCL) consultation process, that levy receipts should be recycled to fund a range of measures, including a programme of energy efficiency measures for the business sector.

  16.  Within the energy sector, electricity companies have consistently adopted a positive approach to the development and implementation of the Energy Efficiency Standards of Performance (EESOP), and also the new Energy Efficiency Commitment (EEC). The Commitment can be viewed as an effort to encourage the development of energy service companies. However, there is no mechanism for determining when this transition has occurred, and therefore ending the need for the Commitment.

  17.  Efforts to reduce demand should not focus only on energy providers; it is also important to address sectors such as appliance manufacturers, architects, builders, companies promoting new energy-consuming technologies and end-users.

  18.  However, efforts to conserve energy should not focus solely on the electricity and gas sectors. Transport is a growing sector in which demand reduction has yet to be fully addressed.

WHAT IMPACT WOULD ANY CHANGES HAVE ON INDUSTRIAL COMPETITIVENESS AND EFFORTS TO TACKLE FUEL POVERTY?

  19.  Measures such as the Renewables Obligation, Climate Change Levy and enhanced energy efficiency targets will begin to impact on customer bills by the end of the current financial year. The Government's Energy Review needs to take account of the political and regulatory issues that this will create, and in particular, the potential impact on the economy and low-income customers.

  20.  EA believes that new energy efficiency measures should be designed to minimise competitive disadvantage to UK business. With regard to the Climate Change Levy, the level of recycling of CCL revenues should be increased and used for implementation measures designed to help business. For measures affecting emissions, EA supports flexible mechanisms, such as emissions trading, in helping to achieve climate change targets. Electricity companies have participated fully in the DETR (now DEFRA) initiative to develop a UK pilot emissions trading scheme.

  21.  The need to eliminate the problem of fuel poverty is now widely accepted. In the absence of favourable changes in other contributing factors, such as rising incomes or improvements in the housing stock, the numbers affected will increase if energy prices rise. Direct actions to improve the housing stock would therefore offset the effect of increasing prices.

  22.  Electricity suppliers have been contributing solutions to the problem, introducing their own initiatives and working with Government, regulatory agencies, consumer groups and charities. In 1999, EA established a Fuel Poverty Task Force, with the objectives of promoting understanding of this issue and providing a forum for the exchange of ideas between energy suppliers. The Task Force comprises all the major UK electricity and gas suppliers and has made a series of recommendations to Government, participating in the development of a national fuel poverty strategy.

  23.  EA believes that, wherever possible, the competitive market should be allowed to provide energy related solutions to the problem, as competition fosters innovation, driving down energy prices. However, while electricity suppliers will play an active role, they cannot solve the problem on their own. Collaboration with other stakeholders is required, including Government, local authorities, housing associations, landlords, house builders and the financial sector. Comprehensive solutions can only be found through a range of welfare, taxation and incomes policies.

IS ANY CHANGE OF GOVERNMENT POLICY NECESSARY? HOW SHOULD GOVERNMENT INFLUENCE COMMERCIAL DECISIONS IN ORDER TO ACHIEVE A SECURE AND DIVERSITY SUPPLY OF ENERGY?

  24.  In recent years Government and regulatory policy in the electricity sector has focussed mainly on driving down costs in the short term, to the exclusion of longer-term issues and externalities. In the early days of regulation, when there was scope for increasing cost efficiency and for introducing clean gas-fired generation, this agenda was compatible with security of supply and environmental objectives. However, there is now an increasing risk of conflict between policy objectives, as has been recognised in the Government's decision to conduct an energy policy review. For instance, renewable generation and combined heat and power, which the Government is aiming to promote, appear to be adversely affected by the design of the new trading arrangements.

  25.  The Government needs to set a high-level policy framework for the energy sector and to take the lead in determining how trade-offs in policy should be made. It is important that this process is transparent, so that the problems of arbitrary political interference are avoided. Ofgem and indeed other regulators should consult with Government on security of supply, social and environmental issues, with a view to contributing towards the agreed objectives. In this way, the public interest can be taken into account in regulatory policy.

  26.  One means of achieving this is through the regulatory impact assessment process. With the increasing importance of environmental and social policy in the energy sector, it is clear that Ofgem will not have available all the information required for a full RIA of each proposal. In such cases, a mechanism should exist for Government to contribute to the impact assessment, thus ensuring greater policy consistency.

  27.  EA believes that wherever possible, energy policy goals should be designed around market-based mechanisms with the removal of unnecessary regulatory barriers to competition and innovation. However, it is recognised that market mechanisms may not always be sufficient to deliver policy goals and that regulation is sometimes necessary. Where such intervention occurs, the industry needs clarity and transparency in the policy and regulatory framework.

  28.  It is not always clear what constitutes unnecessary regulation of the energy sector, EA supports the recommendations of the Better Regulation Task Force, including the proposals that Regulatory Impact Assessments should accompany new initiatives in line with the Cabinet Office Guidelines. We believe that Government should undertake further work on reviewing the effectiveness of market-based solutions, taking account of the particular challenges arising from externalities (such as environmental costs) and social policy changes.

  29.  Investment in the electricity industry has longer term planning timescales than in many other sectors. The industry therefore needs a clear and transparent policy framework to enable it to operate efficiently and cost effectively, which sets out conditions for market operation and Government intervention. Government initiatives should be fair between players, market based wherever possible and with minimal disruption of resource allocation. We believe intervention should be removed as soon as sufficient progress has been achieved to meet a given policy goal.

  30.  Policies affecting the UK energy sector are currently developed and implemented by a wide range of players, including various UK Government departments, regulatory bodies, devolved authorities and agencies, and the European institutions. It is important that these bodies work in unison and do not "compete" to determine policy, setting policy by default in an ad-hoc manner.

  31.  Greater consistency is needed between Government departments in the implementation of energy policies, with a concerted effort being made to reconcile conflicts between competitiveness, security and environmental objectives. It may be desirable for Government to charge one specific department with responsibility for overseeing and co-ordinating energy policy, or possibly to establish a specific body with this remit. Whatever institutional arrangements are used, it is important that energy policy is subject to periodic review at the highest levels of Government. Such reviews could take place on a five-year cycle.

  32.  The transport sector is the source of an increasing proportion of both energy consumption and emissions. It is therefore very important that Government ensures that current and future transport policy is integrated with policy making for the energy sector.

31 October 2001


 
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