Memorandum by British Sugar
British Sugar's seven beet sugar processing
factories are powered by CHP and have been since the 1920s. As
an intensive user of energy and with our output limited by the
beet sugar quota given to the UK under the Common Agricultural
Policy, it has always been in the company's interest to ensure
that our energy usage is as efficient as possible. CHP has been
an important component in our competitiveness and, until recently,
the company has been pleased to use and promote technology which
contributes significantly to the Government's international and
UK targets for CO2 emission reduction and for installed CHP. However,
the CHP industry is now facing a serious crisis largely as a result
of Government policies.
The Government is committed to doubling CHP
installation from 5 GWe to 10 GWe by 2010 as part of its sustainable
energy policy. Current CHP installation in the UK is only 4.7
GWea shortfall in the target of 5.3 GWe. So far from accelerating
to reach the target, investment has all but stopped as the economics
of CHP have deteriorated significantly in the last year as a result
The impact of the New Electricity
Trading Arrangements (NETA) on small generators. OFGEM's report
of 31 August 2001 confirms that the electricity exports of CHP
generators declined by 60 per cent post NETA.
The unprecedented rise in gas prices
(12.5p/therm in March 2000 to 22.5p/therm in May 2001). This is
largely due to market links with other unliberalised European
gas markets via the interconnector.
In addition, the Climate Change
Levy is still applied to electricity exports when these reach
the customer, thereby reducing the potential competitiveness of
CHP schemes still further.
Companies able and willing to invest in the
long-term future of CHP have been forced to shelve investment
plans and to reduce qualifying electrical exports (as defined
under the CHPQA scheme). In British Sugar's case, in the face
of serious losses in our new award-winning CHP plants in Wissington,
Norfolk, and Bury St Edmunds, we have been forced to abandon further
investment of some £100 million in new generation CHP. Our
experience is being replicated throughout the CHP industry and
we believe that in these circumstances the Government's CHP target
has no hope of being met. Furthermore, the country is losing what
has been an efficient and valuable energy industry sector.
In the light of the current rapid decline in
the UK's CHP industry, we would like to make a few comments specific
to the Committee's line of enquiry:
CHP-security of supply
We believe that the value of CHP
and indeed all embedded generation has not been fully explored
as a contribution to security of supply both locally and nationally.
We believe that the risks of massive supply failure, for whatever
reason, are greatly reduced by having a large number of small-scale
generators embedded in and supplying at the local level.
Similarly, the impact of any large
scale central supply failure could clearly be reduced by having
distributed generation capable of supporting local sites or "islands".
Our CHP plants regularly support their sites and associated private
networks during local grid failures.
For optimum delivery of embedded
generation the current network access rules and codes that were
written for a CEGB mindset will have to be overhauled to meet
the needs of the 21st century.
CHP-a low carbon technology for today
Currently public policy fails to
take sufficient account of the value of CHP as an efficient low
carbon technology that is available today and in a form that does
not create problems of acceptability. Much of the technology associated
with renewables either needs further development or is not yet
accepted by society at large (for example, onshore wind farms
still have major planning hurdles to overcome).
The only other significant low carbon
technology available today is nuclear. In our view there is no
justification for promoting nuclear without first embarking on
a major policy effort directed to encouraging the real alternative
of CHP. Government policies are currently working as a major disincentive
to both the continued operation of existing CHP and any potential
investment in new plant.
If CHP is to play a significant role
in the future, as we believe it should, then some immediate policy
reversals will be necessary to turn around the industry so that
it can play its part in a future low carbon economy. Of these
the most immediate should be full exemption for CHP from the Climate
Change Levy, the removal of the adverse affects of NETA on CHP
and an obligation on suppliers to buy electricity generated from
CHP similar to that for renewables.
The efficiency of CHP is unquestioned.
Even CHP which runs on fossil fuels is acknowledged to be significantly
more efficient than conventional generation. It would therefore
make sense to develop policies that work towards a significant
proportion of fossil fuel burn to be from CHP by, say 2030.
CHP-a casualty of "unjoined-up Government"
The conflicting objectives of reducing
real energy prices and promoting environmental benefit has appeared
as stark reality in the case of CHP and renewables. If CHP is
to contribute to security of supply and to achieving Government
targets, both domestic and international, then more policy initiatives
will have to be directed towards ensuring that the CHP sector
revives and thrives. These will have to include short-term measures
as outlined above, but also more long-term measures to ensure
that a real market for environmental "goods" is developed,
including Government-led marketing.
There is a great irony in the fact
that, until recently, industrial CHP installation was proceeding
on a market-led, commercial basis. Notwithstanding the longer
payback periods required, CHP operators could see commercial benefit
in promoting this low carbon technology. It is now clear that
the present tax regime, recent changes to the gas markets and
the Government-driven implementation of NETA with its unfair costs
and risks borne by small, embedded generators have left investment
in industrial CHP quite uneconomic. It is difficult to believe
that this was the deliberate objective of the four or five Government
We hope that this commentary will be of some
value to the Committee. In response to the specific questions
posed relevant to CHP, we would sum up our view as:
Is there a conflict between achieving
security of supply and environmental policy?
CHP technology with its outstanding
record in energy efficiency can make a major contribution to both
security of supply and environmental policy. The, reality of current
Government policies, however, is making the industry less and
less economic and this double benefit will disappear.
What is the role for CHP schemes?
CHP schemes can play a significant role in ensuring
security of supply in the future, provided the economics of investment
We look forward to changes that will encourage
the development of CHP so that it can play a serious role in meeting
the Government's environmental objectives as well as contributing
to security of supply.
31 October 2001