Select Committee on Trade and Industry Appendices to the Minutes of Evidence


APPENDIX 22

Memorandum by British Sugar

BACKGROUND TO BRITISH SUGAR AND CHP

  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.

MISSING THE GOVERNMENT'S TARGET

  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 GWe—a 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 of:

    —  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.

CHP-energy efficient

    —  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 departments involved.

  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 are restored.

  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


 
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