APPENDIX
INTRODUCTION
1. The Government welcomes the Trade and Industry
Committee's report. Security of energy supply has always been
key to the UK's energy policy, and the Government and Ofgem are
closely engaged in monitoring security of supply issues and dialogue
with producer countries in and outside the EU.
2. Although the leading international forecasts are
agreed that world supplies of conventional fuels are adequate
for the next twenty to thirty years,
security of supply has received increased
public attention in the new Millennium following a series of developments
both within and outside the energy markets. In the world energy
market we have seen the California energy crisis, while external
factors have included the increased awareness of terrorist threats
following the events of 11th September.
3. The UK's liberalised and competitive energy markets
are widely regarded as a success (a view supported by the PIU,
see below), and market systems are likely to be central to future
energy policy both domestically and internationally. However,
as the UK moves away from self-sufficiency in gas production,
it is right to look closely at whether it will continue to have
all the appropriate mechanisms in place to ensure that energy
demands are met in a timely, orderly and affordable fashion. The
mechanisms also have to reflect a sustainable approach to energy
which balances its environmental, social and economic impacts.
4. Shortly after the Committee's report was issued
the PIU Energy Review was published. This covers the longer-term
strategic objectives of energy policy for the UK, including the
challenge of climate change and ensuring reliable and competitive
energy supplies for the next generation. The Government has welcomed
the Energy Review as a good basis to stimulate the public consultation
we intend to hold on how best to meet Britain's future energy
requirements. This will lead to a White Paper on energy policy
around the turn of the year.
5. The Trade and Industry Committee's report is an
important and thoughtful contribution to the debate on the security
of supply aspects of the Energy Review and will help inform and
shape the Government response. Accordingly, some of the Government
comments below will be developed further for the White Paper.
6. The following pages respond to the specific conclusions
and recommendations of the Committee's report.
RESPONSE TO TRADE AND INDUSTRY COMMITTEE
REPORT CONCLUSIONS AND RECOMMENDATIONS
(shown below in italics)
GAS
NETWORK
(a) Concerns over bottlenecks in the gas transmission
system seem to us to be well-founded. The Government should keep
under the review the need for more gas landfall facilities and
the advisability of greater diversity in the siting of such facilities.
It should consider whether the market alone will provide the necessary
incentives for this investment, given the lead-times needed for
such construction projects. (Paragraph 28).
The Government and Ofgem recognise the importance
of secure gas transportation networks in order to ensure security
of gas supplies. Secure gas transportation networks require a
longerterm perspective to ensure that adequate transportation
capacity is built to meet future demands. On the other hand, under-investment
in transportation networks can lead to local constraints and 'bottlenecks'.
Bottlenecks in the national transmission system (NTS)
emerged at St Fergus in the second half of 1998. Although these
constraints did not jeopardise security of supply, they have been
reflected in relatively high prices for access to the system (known
as entry capacity) at this terminal. Even before then, Transco
was carrying out incremental investment schemes in the NTS leading
south from St Fergus to alleviate the bottleneck, and further
developments are included within the forthcoming price control.
Capacity at the St Fergus terminal is planned to have increased
over the period from 1998 to 2002/3 by about 30 million cubic
metres (mcm)/day (from around 120 mcm/day to around 150 mcm/day).
The current short-term auctions for entry capacity
into the NTS, conducted by Transco, are intended to ensure an
economically efficient allocation.
In the longer term, while efficient and competitive
traded markets are generally the best vehicles for ensuring security
of gas supplies, the limited ability to promote competition in
the provision of network services in the gas context means that
market mechanisms are inadequate. In such circumstances, without
regulatory intervention, it is unlikely that a single provider
would make optimal investment decisions.
Ofgem is addressing these limitations of the market
by proposing innovative new arrangements as part of Transco's
next price control, covering the period from 2002 until 2007.
These arrangements provide for entry capacity rights to Transco's
network to be offered for sale through long term auctions and
investment incentives on Transco. Prices emerging from these auctions
and the secondary capacity market will improve the signals to
Transco of the need for any additional investment in new capacity
and the location of that investment. Proposals to modify Transco's
network code have been raised in order to introduce auctions later
this year. In planning future investment Transco may also take
into account evidence of demand that emerges through consultations,
including its annual "Ten year statement" exercise on
the requirements of the NTS.
Appropriate signals to Transco of the need for new
investment through price signals, together with evidence from
consultations, coupled with appropriate incentives to respond
to these signals, will encourage Transco to invest to ensure that
there is the appropriate level of capacity in response to the
needs of its customers. Ofgem has said that it will help Transco
to limit the risks associated with new investment by indicating
if it questions whether a proposed investment project would merit
admission to Transco's Regulatory Asset Base.
Options for landing gas that will be available to
the various market participants will include:
_ utilising
the developing ullage (empty capacity) at existing terminals,
as gas production from the UK continental shelf (UKCS) declines
— the proposed long-term auctions will be relevant to this
option;
_ taking offshore
pipe-lines to other terminals where there is expected to be ullage
and, consequently lower prices for entry capacity at such terminals
— the valuations of entry capacity arising through the auctions
should assist users in deciding whether to pursue this option;
and
_ developing
new terminals — consultations, as well as price signals
at existing terminals, would be particularly relevant to this
option. However, new terminals would be likely to face planning
and environmental issues which are not faced, or to the same extent,
by incremental developments at existing sites.
The Government and Ofgem are monitoring these developments
through the DTI/Ofgem Joint Energy Security of Supply Working
Group (JESS). This Group will in particular assess the extent
to which major infrastructure schemes are being brought forward
in a timely manner, and whether there are any barriers or market
distortions preventing their timely development. The Government
will give further consideration to the case for greater diversity
in the siting of gas landfall facilities.
(b) While we recognise that there are practical
and economic factors which hinder the further extension of the
natural gas distribution network, it remains a matter of concern
to a large number of potential consumers, who consider themselves
to be disadvantaged by the restriction on their freedom of choice.
The Government should consider whether further encouragement could
be given to Transco and the supply companies to address this anomaly.
(Paragraph 30).
The Government shares the Committee's view that many
households could benefit from access to the mains gas network.
As part of the Fuel Poverty Strategy, the Government established
a working group to examine the issues surrounding extension of
the network. The group, which included representatives of Government,
OFGEM, Energywatch, the industry, energy efficiency bodies and
other interested parties, produced a report in November 2001.
The report was published on the DTI website in December 2001[2].
The report found that around 1.3 million of the 4.5
million British households in fuel poverty lacked access to mains
gas. Of 900,000 English fuel poor households without gas, 600,000-700,000,
including the bulk of the most vulnerable, could be removed from
fuel poverty through access to the combination of mains gas, central
heating and insulation. The report also found that the provision
of central heating and insulation, in tandem with other fuels,
including fuel oil and solid fuel, could have similar impacts,
although other conventional fuels might lack the convenience,
energy efficiency or environmental benefits that attached to mains
gas.
The report found that there was no case on cost/benefit
grounds for universal extension of the network, but that it was
likely that such a case could be made within a number of communities.
It also concluded that, without intervention, these communities
were unlikely to receive connections. It therefore recommended
a programme aimed at the fuel poor in non-gas areas.
The Government welcomed the report, and is considering
how its recommendations can best be taken forward, in view of
the significant costs of a programme of the kind envisaged by
the working group.
(c) To guard against the unforeseen disruption
of external supplies, it would be prudent for the Government,
together with the industry, to give serious consideration to the
development of strategic gas storage capability. (Paragraph 32).
The Government agrees that it is important to have
a robust capability to deal with disruptions in external, and
indeed indigenous, gas supplies.
Such a capability has been provided by the 'swing
capacity' of the gas fields in the southern North Sea to vary
production levels in response to changes in demand. However, this
capacity has sharply reduced within the last two years, as economic
and technical factors have provided incentives for maximising
immediate gas production. Decreasing gas production from the UKCS
will continue this trend.
Ofgem and DTI are working together to ensure appropriate
market-based regimes — in Great Britain, the UKCS and the
EU — to provide access to flexibility.
For major storage sites, of the kind that the Committee
appears to have in mind, there are three main possibilities:
_ the use of
partially-depleted gas fields in the UKCS, like Rough;
_ additional
on-shore storage, for example underground storage;
_ additional
interconnection with the European continent, to provide access
to the very large gas storage facilities in North West Europe.
The DTI/Ofgem Joint Energy Security of Supply Working
Group (JESS) is keeping under review how far the market is bringing
forward such plans, and whether there are barriers or market distortions
preventing these projects being developed.
Both DTI and Ofgem are aware that an expectation
of regulatory intervention could itself distort the commercial
incentives to develop new storage projects.
ELECTRICITY
NETWORK
Electricity network
(d) The current design of the electricity grid
presents several challenges to the renewable energy and combined
heat and power industries. (Paragraph 38).
The Government agrees with the TIC's view that the
current design of the electricity distribution networks present
a number of challenges to the connection of renewable and other
small generation. The distribution networks are primarily designed
to transfer electricity from the transmission system to customers
and often cannot readily cope with the bi-directional power flows,
voltage variations and increased fault contribution associated
with the connection of generation.
A range of potential barriers to the connection
of generation to the distribution networks were identified by
the joint DTI-Ofgem Embedded Generation Working Group (EGWG) which
reported in June 2001[3].
The EGWG made a number of recommendations for action to address
these perceived barriers and the Government has recently established
a Co-ordinating Group, jointly led by the DTI and Ofgem, to monitor
the implementation of the EGWG recommendations and to advise Ministers
of potential problems.
A number of modifications to the Balancing and Settlement
Code (BSC) have been approved in an attempt to encourage the development
of consolidation services for both small generators and demand
side participants. Modification Proposal P7 'Allocation Of Supplier
Demand To The Same BM Unit In A GSP Group For All Suppliers In
The Same Company Group' and Modification Proposal P67 'Facilitation
of further consolidation options for Licence Exempt Generators
(DTI Consolidation Working Group 'Option 4')' have been approved
by Ofgem to facilitate consolidation services that will enable
both small generators and the demand side to realise embedded
benefits.
(e) Connection charges represent a serious obstacle
for small scale generators which can affect the viability of developments
which may otherwise be financially sound. (Paragraph 40).
The Government agrees that the current connection
charging arrangement may unfairly penalise individual generators
in specific circumstances and discourage the development of otherwise
sound financial projects. In its recommendations, the EGWG pointed
to the need to move away from the current 'deep' connection charging
methodology where generators wishing to connect to the distribution
networks are required to fund all costs associated with their
connection, including any necessary infrastructure reinforcement.
Following on from the EGWG recommendation, Ofgem has conducted
a consultation on the issue of connection charges, amongst other
issues, and published a follow-up document in March 2002[4].
(f) We have highlighted a number of areas where
the systems in place for electricity transmission and distribution
present technical and economic barriers to the future development
of renewable energy and embedded generation. It could be argued
that such obstacles will be overcome once the electricity market
conditions make it economically viable, but this would ignore
the rate at which such capacity must be developed if the Government's
targets of reduced reliance on carbon-based energy sources are
to be achieved in practice. The Government needs to take a strategic
view of what is required and to have a clear idea of what mechanisms
it could use to steer the market to provide the necessary infrastructure.
(Paragraph 43).
The Government recognises the need to address a range
of commercial, technical and regulatory barriers to the connection
of renewable and other small generation to the distribution networks.
The Co-ordinating Group recently established to monitor the implementation
of the EGWG recommendations will ensure that these barriers are
addressed as rapidly as possible The Co-ordinating Group will
also identify any other actions necessary to ensure that the electricity
distribution networks are capable of accommodating the demands
likely to arise from the development of renewable and other small
generation.
(g) The DTI recently announced a feasibility study
of proposals to run a submarine cable from North West Scotland
down the West coast of Great Britain to provide a transmission
system for offshore and other renewable energy generation. This
would appear to have great potential to alleviate the problems
caused by the North-South transmission bottleneck and would provide
a significant boost to the development of renewables such as offshore
wind and wavepower. However, there are concerns about the technical
feasibility and the cost of such a cable. Given the misgivings
that have been expressed we welcome the feasibility study commissioned
by the Government. (Paragraph 44).
The Government welcomes the TIC's support for the
recent study into the feasibility of a western offshore transmission
link. The outcome of the study[5]
confirmed the viability of the concept, but recommended that further
detailed investigation should take place in the context of a general
strategic review of future transmission requirement arising from
the likely development of renewable generation in the UK. At this
stage there appear to be no overriding technical constraints to
the construction of such a link. The Government has moved rapidly
to initiate a strategic review of transmission requirements in
conjunction with the GB transmission licensees and Ofgem. A working
group has been set up, which will examine the technical, regulatory
and financial implications for the GB transmission network based
on a number of scenarios of the development of large - scale renewable
generation. This group has already met and further meetings are
scheduled. It is expected that the group will report in Autumn
2002.
THE
ROLE OF
THE REGULATOR
IN INVESTMENT
The Role of the Regulator in Investment
(h) We are pleased that Ofgem is reviewing the
operation of RPI - x and is aware of the need to devise a formula
that will give clearer signals to the market about long-term investment.
We also note that, by the time we took oral evidence from them,
both NGC and Transco expressed themselves satisfied that their
concerns about investment needs would be taken into account. (Paragraph
49).
The Government notes this recommendation, which is
primarily for Ofgem. The Government welcomes the steps that Ofgem
has taken to provide incentives for the construction of new infrastructure
through innovative market-led arrangements.
Ofgem recognises the limits of the traditional RPI-X
form of regulation, which the Committee has highlighted. In particular,
while this form of regulation has succeeded in exerting downward
pressure on operating costs and prices, there is a risk that incentives
to maintain and enhance the networks may not be appropriate.
For this reason, Ofgem is building upon the RPI-X
model of regulation by proposing innovative arrangements to address
the concerns expressed about investment incentives.
In the gas context, Transco's allowed revenues under
the forthcoming price control period (2002-7) have been set against
explicit entry and exit capacity output measures for each of the
five years of the price control. Transco will be required to offer
for sale a high proportion of these entry capacity output measures
through a series of longer and shorterterm auctions of firm,
tradable capacity rights. Signals emerging from these auctions,
combined with a new financial incentive for Transco to move away
from the initial baseline output measures, will encourage Transco
to invest in expanding transportation capacity to meet the demands
of its customers.
Similarly, for electricity, Ofgem has published revised
proposals for new transmission access and transmission losses
arrangements, involving financially firm, tradable access rights.
The new transmission access arrangements would enable market-based
signals to emerge on the value of access to the transmission system
at different locations. Trading of long-term transmission access
rights should also see the emergence of signals of future demand,
which, along with appropriate incentive arrangements, will assist
NGC in investing to meet the demands of its customers.
Through this approach, Ofgem is seeking to ensure
appropriate levels of investment in gas and electricity infrastructure
by facilitating the development of price signals to provide network
operators with improved information about the levels and locations
of desired investment. It will be important for Ofgem to monitor
the effectiveness of the incentives to invest to ensure they remain
effective.
(i) We urge the Department and Ofgem to make it
a priority to ensure that companies are given sufficient leeway
to invest in maintaining and developing a robust energy infrastructure,
and to continue to keep under review all the mechanisms available
to ensure that there are no regulatory/fiscal disincentives to
such investment. (Paragraph 49).
The Government and Ofgem agree on the importance
of maintaining a robust energy infrastructure.
In the downstream gas and electricity markets this
is a matter for Ofgem, which has devised innovative arrangements
to provide incentives for Transco (as owner/operator of the National
Transmission System) to invest on a market-led basis. The relevant
provisions are set out in Transco's next price control, covering
the period from 2002 until 2007 and Transco's National Transmission
System system operator incentives for the same period.
As transmission network owner, NGC is currently provided
with incentives under the RPI-X form of regulation to invest efficiently
in its transmission system to meet the demands of its customers.
With the development of new transmission access proposals, Ofgem
will consult on new incentive arrangements on NGC as system operator
to ensure that NGC is appropriately incentivised by the market
to deliver the benefits associated with improved investment signals
of the new transmission access arrangements.
Offshore infrastructure investment — including
offshore pipe-lines from elsewhere in the North Sea and interconnectors
— is a matter for commercial players.
Through the DTI/Ofgem Joint Energy Security of Supply
Working Group (JESS) the DTI and Ofgem are monitoring these issues.
The Group is due to make its first report to ministers and GEMA
(the Gas and Electricity Markets Authority) shortly.
DIVERSITY
OF FUEL
SUPPLY
Diversity of fuel supply
(j) We agree with the view that it should not
be the role of Government to dictate the appropriate mix of fuels
for electricity generation, although that need not prevent intervention
by the Government and the Regulator to ensure that long-term security
of supply is maintained. (Paragraph 53).
(k) Furthermore, we consider that security of
energy supply can be improved by retaining a capacity to use a
variety of different fuels to generate electricity. Even if the
exact mix of fuels is left to market forces, it is arguable that
the Government should at the very least take no action that closes
off options, and perhaps should be prepared to make adjustments
to its policies to keep options open. (Paragraph 53).
The issue of security including diversity, keeping
options open and the role of Government and regulators will be
important factors in the forthcoming White Paper.
The PIU Energy Review addresses a number of themes
relevant to this area. It states that competitive markets have
been a success and should remain the cornerstone of energy policy.
It argues that government intervention may be justified on grounds
of market failure, equity issues or strategic/political reasons
but notes that grounds for intervention do not necessarily justify
intervention. Finally a central theme of the PIU report is the
need to create and keep open options. These ideas will be further
explored in the public debate that will lead to the White Paper.
STRATEGIC
PLANNING
Strategic planning
(l) As far as we could ascertain, the timeframe
for energy planning adopted by the Department was "at least
seven years". We agree that changes in energy markets over
longer periods are difficult to predict, but given the long lead-time
necessary to provide new infrastructure and the apparent short-termism
of markets, it would be prudent to try to take a twenty year or
longer view. This would not necessarily mean the establishment
of a "futurology" section in the DTI; it might simply
require a commitment to revisiting the sorts of questions considered
by the PIU on a regular basis with ad hoc teams from all relevant
Departments, say every five to seven years. (Paragraph 54).
The Government's memorandum to the Committee indicated
that the remit of the DTI/Ofgem Joint Energy Security of Supply
(JESS) working group included monitoring at a strategic level
over a timescale of at least seven years ahead. The reference
to seven years links to the availability of projections in the
Seven-Year Statement by the National Grid Company. But it is clear
that the remit is not limited to seven years. The Group has considered
analyses beyond that period.
More generally, the DTI undertakes considerable analysis
to consider strategic issues on a longer timeframe. For example,
the Department's projections of UK energy demands and supply mix
cover the period to 2020[6].
Projections of gas import dependency — to which reference
is made in the Memorandum — also extend to 2020. The DTI
submission to the PIU Energy Review covered a number of these
longer-term issues. In an environmental context, the Inter-departmental
Analysts Group7[7],
which fed its analyses into the PIU, has considered various scenario
projections for the period to 2050. Such analyses feed into policy
decisions. The Renewables Obligation, for example, has been set
to 2010, whilst policy has been set on the basis that it will
be in force as an instrument for 25 years.
However, it is also recognised that it is very difficult
to predict developments in the energy market over such long time
horizons. The scope for forecasting error is greater over the
longer term and Government assessments need to take full account
of all available information, including forward price developments
which reflect the markets assessment of future trends, and evidence
about companies own approaches to investment and asset management.
Secure and effective infrastructure requires not
only adequate initial investment, but also a professional approach
by the respective companies to asset stewardship. To obtain assurance
on the status of asset stewardship and to promote best practices
between the companies, Ofgem is undertaking its Asset Risk Management
project that will survey the status of the Distribution Network
Operators (DNOs), National Grid, and Transco. The initial survey
is proposed for this coming summer.
This work is consistent with a recent initiative
by DTI to survey the electricity distribution companies' state
of operational preparedness for handling emergency events such
as storms.
Exploitation of the UK's oil and gas reserves
Exploitation of the UK's oil and gas reserves
(m) We are pleased that PILOT appears to be contributing
to the exploitation of the UK's gas and oil reserves. However,
we are concerned that there may still be gaps in the approach
[as shown by the difficulty in developing better seismic imaging
and techniques]. We also support the UKOOA's comments on the desirability
of a flexible approach to the taxation of the UKCS oil industry
if reserves are to be used to their full potential. (Paragraph
58).
The Government welcomes the Committee's support for
the PILOT strategic forum. The representation on this group -
Government departments, all sectors of the oil and gas industry,
trades unionists - makes it uniquely suited to dealing with a
range of important industrial issues of the type cited by the
Committee. The significant progress made in the last year has
most recently been published in the PILOT annual report for 2001
8[8], a copy
of which has been placed in the Library of the House.
The Government recognises the importance of developing
seismic imaging equipment and techniques. SMEs in particular are
well placed to develop specialised software modules to be incorporated
into the large software systems used by the oil companies, and
financial support is being provided for this. The Industry Technology
Facilitator, a PILOT initiative, recently announced the launch
of a £4 million programme of projects, mostly in UK universities,
to provide the next generation of seismic imaging software for
the subsurface. In addition, DTI and the Research Councils, NERC
and EPSRC, are supporting projects in universities and companies
aimed at developing improved seismic imaging techniques and software,
and further opportunities for LINK projects are being pursued.
Changes to the North Sea fiscal regime have been
made over the years to ensure an appropriate balance between the
incentive to invest and the need for a regime that raises a fair
share of revenue for the nation. Most recently, DTI, with Treasury
approval, has waived royalty on future production associated with
specified incremental investment. This has meant that further
development of two mature fields is taking place which would not
otherwise have proceeded. There is limited scope for discretionary
relief in other parts of the North Sea fiscal regime, but DTI
would welcome the chance to consider further good cases for royalty
remission.
(n) We welcome the Regulator's assurance that
offshore costs were being taken into account when Ofgem was considering
gas regulation. Clearly, investment in maximising the exploitation
of UK reserves will delay the time at which security of supply
becomes an issue for this country. We understand that the Regulator
is about to publish amended proposals for gas balancing and express
the hope that they do not damage offshore investment (paragraph
73).
The Government broadly agrees with this recommendation.
Ofgem's primary duty is to exercise its functions
so as to protect the interests of gas consumers, future as well
as existing, wherever appropriate by promoting competition. Therefore,
Ofgem must take into account the impact of its decisions on security
of future supplies.
This does not require Ofgem to take specific account
of the impact of those decisions on the exploitation of UK reserves—
though, given the importance of the UKCS for supplying gas consumers,
it would be entirely natural for Ofgem to take that aspect fully
into account. It would also be entirely natural for Ofgem to take
into account the impact of its decisions on projects to deliver
gas to GB consumers from other sources, such as offshore pipe-lines
from elsewhere in the North Sea and interconnectors.
More generally, the Better Regulation Task Force
has commended to all sectoral regulators the importance of taking
into account the full implications of regulatory proposals.
Ofgem's proposals on gas balancing in its document
of February 20029[9]
take account of the concerns raised by respondents to the February
2001 proposals, including the concerns about the costs of moving
to shorter balancing periods. The Government welcomes the further
opportunity for discussions within the industry, and for tabling
alternative reform proposals, that Ofgem have confirmed in their
latest proposals.
NEW
ELECTRICITY TRADING
ARRANGEMENTS (NETA)
New Electricity Trading Arrangements
(o) The problems with NETA epitomise the conflicts
inherent in trying to achieve an energy policy that simultaneously
guarantees security of supply, delivers environmental objectives
and combats fuel poverty. They also encapsulate the dangers of
trying to deliver a broad, balanced energy policy solely by means
of a Regulator whose chief objective is to promote low prices
through competition. As presently constituted, NETA poses a major
disincentive to the commissioning and operation of small-scale
generators. It is clear that urgent action must be taken to ameliorate
the effects of NETA if the Government is to meet its environmental
objectives. (Paragraph 69).
(p) We do not advocate specific amendments to
the NETA regime. However, a 'wait and see' policy does not seem
likely to stem — let alone reverse — the dramatic
decline in both the output and the profitability of small scale
generators. We are pleased that the Department acted swiftly once
the problems with NETA became clear, and we trust that in its
reply to our Report the Department will be able to outline what
measures it is taking to ameliorate the situation. (Paragraph
70).
Ofgem's principle statutory objective is to protect
the interests of consumers, wherever appropriate by promoting
effective competition. In pursuing this objective, Ofgem must,
among other things, have regard to the effect on the environment
of the activities of electricity and gas licensees. Ofgem is governed
by an Authority and its powers are provided for under the Gas
Act 1986, the Electricity Act 1989 and the Utilities Act 2000.
The legislation does allow Government to provide guidance on the
contribution it considers the Authority should make towards the
attainment of the Governments social and environmental policies.
The Authority is required to have regard to this guidance in carrying
out its statutory duties. In addition Ofgem have developed Environmental
and Social Action Plans to take account of the sustainable development
aspects of their work, including fuel poverty and environmental
issues.
On 4 April 2002, the DTI published the Government
Response to its consultation on NETA and smaller generators (the
NETA Consultation) of 1 November 200110[10].
This sets out measures which the Government believes can help
to ameliorate the situation for smaller generators under NETA,
including urgent practical action to help smaller generators.
The Department notes that the Committee does not advocate specific
amendments to the NETA regime, recognising the legal constraints
and the need to allow time to let the market bed in.
A number of modifications to the Balancing and Settlement
Code (BSC) have been approved in an attempt to help embedded participants
such as renewable and CHP generators by providing more choice
in their contracting arrangements with electricity suppliers.
Ofgem considers that any potential modification should be considered
against the relevant BSC objectives and Ofgem's statutory objectives,
and should endeavour to maintain an equal application of the rules
to all participants.
In the recent Budget the Chancellor announced the
completion of the exemption of Good Quality CHP from the climate
change levy, thus ensuring that Good Quality CHP used on site,
sold direct and sold indirect will be exempt from the levy. The
decision recognises the environmental benefits of all good quality
CHP and will give the CHP sector, which has been hard hit recently
by falling electricity prices and rising gas prices, a much needed
boost.
Government consultation on NETA and smaller generators
The NETA Consultation confirmed the Government's
original analysis that smaller generators face two main issues
under NETA, (i) cost reflectivity and related imbalance price
risk and (ii) a lack of route to market (mainly through lack of
consolidation services, and through commercial obstacles).
Ofgem's report to the DTI on the review of the initial
impact of NETA on smaller generators concluded that the output
of smaller generators had fallen and that the prices received
for that output during the first two months of NETA were lower
than the previous year. The document also commented that there
was limited consolidation services available and that, excluding
wind power generation, the output of smaller generators was not
less predictable than other generators.
Ofgem considers that the approval of several modifications
to the BSC will help facilitate further development of consolidation
services and therefore benefit embedded participants.
Positive improvements have been made since the consultation
document, including further reduction of volatility of imbalance
prices and practical work to address some of the technical obstacles
to consolidation. The Government recognises that concerns remain,
despite these improvements, about cost reflectivity and imbalance
price risk, and wider commercial considerations, particularly
the negotiating position of smaller generators compared to local
incumbent suppliers.
FURTHER ACTION
The Government Response identifies further action
within NETA to address these issues:
Improving the effective operation of NETA,
in particular risk management: a forthcoming modification to the
system to reduce 'gate closure' (i.e. participants will not have
to predict their output as far in advance) is widely expected
to have a significant impact, helping all participants to manage
their risk and reduce their exposure to imbalance prices.
The Modification Proposal will come to the Gas and
Electricity Markets Authority (GEMA) for decision in April 2002.
It has the support of market participants and Ofgem has expressed
its view that the proposed implementation date of 2 July 2002
is appropriate.
Access to embedded benefits:
DTI and Ofgem will undertake work to look at the case for, and
practicability of, 'unbundling' the benefits of embedded generation
in contract arrangements with electricity suppliers. This could
improve the commercial position for smaller generators and independent
consolidators.
Guidance for smaller generators:
the Government will put in place work to assess the need for comprehensive
guidance for smaller generators. DTI will make available funding
to provide guidance provided the need is established. Ofgem will
co-ordinate publication of such guidance if the need is established.
Standardisation of contracts:
Ofgem will make an assessment of the need for standard contracts
for smaller generators and how such contracts could be implemented.
Cost reflectivity: the
Government believes it is too early to reach a firm assessment
on cost reflectivity of the current system. Further analysis,
including data for a whole year of NETA, is necessary. The Government
has considered very carefully proposals made by respondents to
the consultation for more radical change, but it does not believe
that quick, practical radical changes have been identified. Ofgem
has committed in its Corporate Plan to carry out a review of the
operation of the first year of NETA, to be published in quarter
two of 2002. Ofgem has indicated that it intends to cover, amongst
other issues, the operation of the Balancing Mechanism. The Government
has asked Ofgem to report on progress in further improving the
effectiveness of NETA and ensuring imbalance prices are genuinely
cost reflective, as part of its review of the first year's operation
of NETA. If such an assessment does not show that the current
system is working, the Government will need to reconsider the
case for more radical changes to the NETA system.
The Government is also considering the PIU's recommendations,
and will continue to monitor developments in these areas carefully.
We agree with the Committee it is vital that Government energy
policy provides for security of supply and a balanced mix of generation
sources, as well as taking into account environmental and social
objectives. NETA and other systems must be consistent with wider
policy objectives. If any conflict of interest becomes apparent,
we will address this as a matter of urgency. In addition, as described
above, Ofgem will be publishing a one-year review of NETA. If
this does not show the system is working effectively, Government
will need to reconsider the case for more radical changes to the
NETA system.
GENERATING
CAPACITY
(q) We were rather startled to learn that Ofgem
has no target for maintaining a reserve of generating capacity:
it regards its task as being limited to monitoring generating
capacity and publishing this information for the benefit of the
market, so that the market can then act to meet any shortage.
(Paragraph 77).
(r) We have not yet heard any evidence that leads
us to believe that the market is sufficiently far-sighted to guarantee
enough reserve generating capacity without some element of planning
by Government or one of its agents. This does not mean that we
believe that Government should try to dictate to the market; simply
that someone, whether the Department (which we would prefer) or
Ofgem should take a strategic view about what level of reserve
capacity is necessary — presumably,
slightly more than 20% — and should be prepared to
use market mechanisms to encourage the construction of extra capacity
if necessary. (Paragraph 78).
While Ofgem does not set specific targets for reserve
margins, DTI, Ofgem and NGC keep a close watch on developments
in the energy markets. Monitoring the adequacy of generating capacity
and the way that the generation industry is responding to market
signals is one of the key tasks of the DTI-Ofgem Joint Energy
Security of Supply (JESS) working group, set up in July 2001 to
assess the risks to energy supplies over a timescale of at least
seven years ahead.
Ofgem does not set specific targets for reserve generating
capacity as it believes that the incentive mechanisms in place
under NETA and in the markets will provide participants with the
appropriate signals to invest. Ofgem considers that the electricity
forward price curve provides sufficient information on prices
to facilitate investment decisions. The JESS Group will be monitoring
the situation to identify any barriers or market distortions that
prevent timely investment in response to the forward price signals.
At present the Government sees no case for intervention.
Current margins are more than adequate: according to the latest
update of National Grids 'Seven Year Statement', the margin of
generating capacity over peak winter demand (the 'plant margin')
in England and Wales was about 26.6% in 2001/02. National Grid
figures show that the England and Wales plant margin has risen
in almost every year since 1995/96 when it was about 18%, its
lowest point since electricity privatisation. It is widely judged
that a margin of about 20% is quite adequate to avoid disruption
to supply.
National Grid project that the plant margin will
reach 28.5% in 2002/3 as plant under construction is completed.
Thereafter the margin would decline unless further new plant is
built. Without any further new build, it would be 17.9% by 2007/8.
But in most cases new capacity takes only about three years to
construct and begin generating. The Government will continue to
monitor developments in the generating market closely, to ensure
that appropriate market mechanisms are bringing forward timely
investment.
PLANNING
Planning
(s) Planning problems so strongly recurred in
the evidence given to us that we conclude that the planning system
currently forms a major obstacle to the Government's achieving
its energy policy in respect of both security of supply and environmental
objectives. We believe that a better way of proceeding would be
considerably to strengthen planning guidance in favour of granting
permission to energy developments, and for the Government to be
prepared, if necessary, to call in more planning applications
to enforce the guidance. (Paragraph 84).
(t) We are aware that the Department for Environment,
Food and Rural Affairs (DEFRA) has been engaged in public consultation
on planning guidance (PPG 22), and we look forward to learning
the outcome of that consultation and any amendments that the Department
may make as a result. (Paragraph 84).
A number of points on planning have been raised by
the PIU in their Energy Review, and Government will be considering
those concerns, along with the Committee's recommendations, in
the forthcoming White Paper.
As the Committee is aware, the Department of Transport,
Local Government and the Regions (rather than DEFRA) has launched
a raft of consultation papers on aspects of the planning regime
in fulfilment of their overall agenda to modernise the planning
system11[11].
The keystone is the Green Paper on the overall planning system.
Here the concern is that the planning system is becoming out of
date, is bureaucratic, blocks rather than promotes development,
is not fast enough for business in delivering decisions, and fails
to engage the public sufficiently. What is proposed is a simpler,
faster, more accessible system. Thus the Green Paper seeks to
simplify the plan hierarchy, to engage the local community more
in plan preparation, to reduce national prescription in planning
and to refocus effort into much clearer policy statements including
national statements about major infrastructure needs, to introduce
new business zones where specific planning permission is not needed
and to provide for faster processing of planning applications.
A more open and simpler community benefit policy is proposed for
negotiating planning gain, and there are proposals for a clearer,
faster compulsory purchase scheme with better compensation arrangements.
As part of the reforms DTLR has produced a consultation
paper New Parliamentary Procedures for Processing Major Infrastructure
Projects12[12],
which outlines details of proposed Parliamentary procedures for
handling major infrastructure projects of national importance.
The aim of the proposals is to streamline the procedures and reduce
unnecessary delays, and large energy projects are included in
the list of projects that could be designated to follow this route.
Many of the proposals outlined in the Green Paper,
including the Parliamentary procedures for dealing with major
infrastructure projects will require primary legislation.
In the meantime, in line with these changes, DTLR
is revisiting its planning policy guidance13[13]
on renewable energy projects. A workshop with stakeholders has
already taken place and comments from the workshop will be taken
into account in the revision process. It is proposed to issue
a new draft PPG 22 for consultation in summer 2002.
DOMESTIC
CUSTOMERS
Domestic customers
(u) Domestic customers show little awareness that
the recent low prices of gas and electricity are, for various
reasons, unlikely to continue. We hope that both this Report and
that from the PIU, when it is made public, will help to inform
public debate about these issues. (Paragraph 87).
The PIU report recommended that Government should
involve the public in wider debates on the issues facing the development
of energy policy. The Government recognises the importance of
public debate in this area: an important strand of the consultation
leading to the White Paper will be a real drive to engage and
consult the public.
QUALITY
OF ELECTRICITY
SUPPLY
Quality of electricity supply
(v) We consider that the effect of variations
in the quality of electricity supply is an area worth some investigation;
and we would welcome the Department's comments on whether any
research is being carried out at present, and where it might best
be directed. Any growth in embedded generation and increase in
the number of generators on the network will possibly add to the
difficulties in maintaining quality of supply. These factors have
to be taken into account now in considering what investment is
necessary to maintain a secure, reliable electricity supply. (Paragraph
90).
Supply continuity
DTI's Engineering Inspectorate has been dealing with
a small number of cases in which consumers in rural areas are
complaining about frequent interruptions to their electricity
supply. The ongoing investigation into the network supplying North
Northumberland is a case in point: consumers have had to endure
frequent interruptions and this has had a profound impact on many
activities, e.g. loss of production, loss of business, and serious
inconvenience.
Although it would be impractical and uneconomic for
rural consumers supplied by overhead lines to benefit from the
same level of security of supply as urban consumers who are supplied
by underground cable networks, there is tangible evidence to suggest
that some rural consumers are required to endure more supply interruptions
than can be reasonably expected in the circumstances. Ofgem has
taken important steps to strengthen the incentives on distribution
companies to provide a good quality of service to consumers.
From 1 April 2002 a new Guaranteed Standard of Performance14[14]
will be introduced which will mean that consumers that suffer
more than three interruptions of more than three hours duration
over the course of the year will receive a compensation payment
of £50 (this represents around two-thirds of the average
distribution use of system charge levied by distribution companies
on consumers). This protection is directly aimed at 'worst-served'
consumers.
Ofgem is also in the process of introducing an incentive
scheme for distribution companies that focuses on key areas of
quality of service — the number of interruptions to supply,
the duration of interruptions to supply and the quality of telephone
response provided by distribution companies. This will operate
from 1 April 2002 to March 2005. Under this scheme, distribution
companies can be penalised up to 2 per cent of their revenue (on
average around £4 million per annum per company) for failure
to meet pre-specified targets for the number and duration of interruptions
to supply and if the quality of their telephone response is below
the average for the industry as a whole. Companies also have the
opportunity of earning additional revenue in the final year of
the incentive scheme if they exceed their targets, depending on
the rate of improvement in performance up to that date.
Taken together these mechanisms provide significant
additional protection to consumers in respect of the quality of
service they receive from distribution companies.
At the time of the next price control review in 2003/04
it will be important to assess whether consumers desire further
significant improvements in quality of service, and if so, how
to provide distribution companies with incentives to deliver these
improvements. This will require consideration of the potential
trade-off between higher prices and higher quality—although
it will be important to ensure that companies have the incentive
to invest efficiently in their network.
Embedded generation
It is not clear at this stage what impact, either
positive or negative, that an increase in distributed generation
could have on the quality of service delivered to consumers. Ensuring
that distribution companies have appropriate incentives for the
connection of distributed generation will be one of the most important
issues for the next price control review and is an area that Ofgem
has already taken important steps with the publication of its
follow-up paper on distributed generation in March 2002.
The introduction of widespread distributed generation
in electricity networks will certainly raise some technical issues
not hitherto faced by distributors. Close monitoring of developments
in embedded generation is necessary by all those involved to ensure
the emerging issues are identified and managed.
INDUSTRIAL
CUSTOMERS
Industrial customers
(w) We do not consider that it would be feasible
or desirable to re-allocate the costs of electricity production
to place a greater burden on domestic customers. However, we are
concerned about the effect of energy prices on the competitive
position of UK industry. We are pleased to note the high priority
that the Minister gives to the Department's objective in this
regard; we do not underestimate the difficulties he and his officials
will face in continuing to meet that objective. A number of other
factors, such as the Climate Change Levy and the situation of
the CHP sector, have a significant impact on industrial consumers
and we draw the Department's — and,
indeed, HM Treasury's — attention to our comments
on these issues elsewhere in this Report. (Paragraph 95).
We welcome these observations. The Governments recently-published
Fuel Poverty Strategy 15[15]
explains that energy prices play a very significant role in fuel
poverty. The Strategy sets out how we aim to tackle the problem,
mainly through energy efficiency measures.
We will continue to try to ensure that UK industrial
fuel prices compare favourably with those in other EU and G7 member
states. The UK does, however, have the lowest industrial and commercial
gas prices in the EU. In addition the Climate Change Levy does
appear to have raised awareness of energy efficiency in the non-domestic
sector. Early indications are that the Climate Change Agreements
with energy-intensive industries are producing energy savings
that bring cost reductions to industry as well as contributing
to the fight against climate change.
A three-point strategy has been put in place by the
Government to address the problem of high gas prices:
_ to press
for greater liberalisation and competition in the European Market
_ to improve
the functioning of the British market. The Government has been
aware for some time of concerns about the operation of the British
market. DTI therefore published a consultation document 'A Consultation
on Gas Prices and Possible Improvements to Market Efficiency'
in November 2001 to address these concerns with the aim of laying
them to rest or obtaining sufficient evidence to present them
to the appropriate competition authority. The document also sought
views on the benefits of improved information flows between offshore
and onshore. The consultation closed on 28 February and officals
are currently considering the responses with colleagues from Ofgem
and OFT.
_ to take action
against anti-competitive behaviour. In February 2001, the Secretary
of State for Trade & Industry asked the European Commission
to undertake an inquiry into the operation of the Anglo-Belgian
gas interconnector. The Commission completed its inquiry in March
2002 and found that there is no evidence of anti-competitive behaviour.
The CHP sector has been hard hit recently by falling
electricity prices and rising gas prices. In the recent Budget
the Chancellor announced the completion of the exemption of Good
Quality CHP from the climate change levy, thus ensuring that Good
Quality CHP used on site, sold direct and sold indirect will be
exempt from the levy. The decision recognises the environmental
benefits of all good quality CHP and will give the sector a much
needed boost.
LIBERALISATION
OF GAS
AND ELECTRICITY
MARKETS IN
THE EU
(x) It would be sensible to concentrate efforts
within the EU on the most important areas: liberalisation of transmission
systems should take precedence over opening up domestic markets,
if the former is feasible without the latter. But for the short
term, it would also seem prudent for the UK's policy on energy
security to be based on the assumption that liberalisation is
not certain. The Government must take a view as to whether this
means that there must be a greater reliance on indigenous sources
of supply than may be either necessary or desirable in the longer
term; if so, then the recommendations we make elsewhere in this
Report about maximising the exploitation of UK fossil fuel resources
and removing barriers to the development of non-fossil fuel energy
become all the more urgent. (Paragraphs 98 and 102).
Political commitment to liberalisation was given
by all Member States at the Lisbon Summit in 2000; the conclusions
reached at the recent Barcelona Summit were a significant step
towards meeting this commitment. They set out the key principles
needed for effective competition, ie network separation, published
tariffs, a regulatory authority in each Member State, and a cross-border
trading mechanism. It was agreed that industrial and commercial
customers must be able to choose their suppliers by 2004 and that
agreement should be reached by spring 2003 on 'further measures',
ie opening the domestic sector. This is an excellent basis for
further progress towards liberalisation.
It is implicit in these arrangements, however, that
domestic liberalisation will proceed on a slightly slower timescale
in the short to medium term, so the UK will continue to rely to
a high degree on domestic resources. We will continue, therefore,
to keep the situation under close review, and to maximise production
of oil and gas from the UKCS (see response to recommendation (m),
above).
RENEWABLE
ENERGY
(y) While not questioning the Government's commitment
to increasing the share of electricity generation provided by
renewables, we do not know how the Government reached a figure
of 10% as the target for 2010 and we would like the reasoning
clarified. (Paragraph 105).
The Government proposed working towards a target
of renewable energy providing 10% of UK electricity supplies as
soon as possible, hopefully by 2010, in its first consultation
paper on renewables, "New & Renewable Energy: Prospects
for the 21st Century", published in March
199916[16].
This proposal was based on the supporting analysis undertaken
in preparation for the consultation and published simultaneously
as an ETSU report, "New & Renewable Energy: Prospects
for the 21st Century: Supporting Analysis17[17].
The consultation paper said that producing 10% of the UK's electricity
from renewables appeared to be a feasible target although there
would be some additional cost as compared with the cheapest sources
of electricity generation. The level of those costs would depend
on the nature of support measures, the extent to which both longer
term and near market technologies were supported, and the success
of other measures in such areas as planning.
Most responses to that consultation supported the
proposed target or suggested that a more challenging target should
be set but some thought it too ambitious. Reflecting those concerns,
the Government published "New & Renewable Energy:
Prospects for the 21st Century: Conclusions in response
to the public consultation"18[18],
in January 2000, announcing its intention of placing a new and
long term renewables obligation on electricity suppliers as part
of a package of measures designed to achieve a target of generating
10% of electricity from renewable sources by 2001, subject to
the cost to consumers being acceptable. That paper also outlined
the buy-out mechanism proposed as a means of ensuring that costs
would not rise out of control if there were serious delays in
the development of the new generating capacity needed.
The target of 10% then continued as the basis for
two further consultations on the fine detail of the proposed Renewables
Obligation.19[19]
The recent EU Directive on the promotion of renewable
energy in the internal electricity market allocated indicative
targets to Member States for the deployment of renewable energy
to achieve the EU-wide target of 12% of electricity consumption
to come from renewable sources, as part of Europe's commitment
to the Kyoto Protocol. The UK's indicative target is set at 10%.
(z) A target of 10% of power generation from renewable
sources, if achievable, would be a very helpful contribution to
achieving greater security of supply, as well as meeting environmental
objectives. We note that some proponents claim that renewable
sources have even greater potential to meet energy requirements.
We are not in a position to judge such potential, but welcome
the fact that the feasibility of higher, longer-term targets has
been investigated by the PIU. We look forward to learning its
conclusions on this. (Paragraph 110).
One proposal in the recent PIU Energy Review was
that a longer-term target for renewable energy of 20% by 2020
should be set. However it did not reach a conclusion about the
means by which such a target should be delivered and suggested
that this should wait upon the outcome of a review of the Renewables
Obligation in 2006/7. The Government will need to consider the
PIU's recommendations carefully and will be consulting the public
as part of the process of working towards a White Paper later
in the year.
(aa) The key players — the National Grid
Company and the distribution companies as represented by the Electricity
Association — seemed confident that a 10% target for renewable
power would not cause insuperable problems for the network. (Paragraph
107).
It should be recognised that not all forms of renewables
generation are intermittent and so a potentially higher contribution
from renewables may be able to be accommodated without the need
for further infrastructural investment. From discussions with
the key players, it also seems that a 10%, or even higher, contribution
from intermittent generating stations such as wind would not cause
significant problems to the stability of the transmission and
distribution system. The degree of impact that intermittent generation
has on such systems will depend in part on the degree to which
such forms of generation are concentrated at certain points on
the grid, and on whether they are embedded in the distribution
system or connected to the wider transmission system.
(bb) In practice, it is almost impossible
accurately to estimate the costs of the Renewables Obligation
to consumers, because of the significant variation in factors
such as predicted underlying electricity prices and possible changes
in the costs of generating renewable power. We think the costs
of meeting the target in the current market may well be higher
than the Government hopes. This is critical because the 10% target
is subject to the proviso that the costs to consumers are acceptable.
The Government must take other measures, such as amendments to
the planning law and direct assistance with research and development
costs, if the renewables sector is to meet the 10% target by 2010,
let alone any higher target by 2020. (Paragraphs 109 and 112).
The costs of the Obligation to consumers will be
capped by the buy-out mechanism and it is possible that technological
development and competition between renewables generators could
push the costs below this maximum amount. However, there is a
risk that the maximum amount will be insufficient to allow the
targets to be met by new renewables generation, as opposed to
suppliers buying their way out of the Obligation, because renewables
remain too expensive.
The Government recognises that achieving the 10%
target by 2010 within the 3p/kWh buy-out price is an ambitious
target, but it is one which we think is achievable. We will monitor
progress with the Obligation carefully.The Government accepts
that the Renewables Obligation is not the only policy tool for
the promotion of renewables and that a range of measures will
be needed if the 10% target is to be met. We have already announced
a package of £260 million of direct financial support over
the next few years to encourage those technologies that are not
yet fully established options in the marketplace. We have also
taken steps to help NFFO (non-fossil fuel obligation) projects
overcome difficulties such as those associated with planning and
are working with colleagues at the DTLR to revise the current
planning guidance for renewable energy projects, PPG22, to reflect
the past decade of experience of such projects in the UK (see
reply to recommendations (s) and (t), above).
(cc) As far as the scope of the Renewables
Obligation is concerned, it seems perverse that some industries
being promoted by the Government for their environmental benefits
should be excluded from support under the terms of the obligation.
The Combined Heat and Power Association told us that Ministers
are considering the possibility of introducing primary legislation
to remove the anomaly from that sector. We recommend that a Bill
be brought forward as soon as possible, and that Ministers should
take the opportunity of that legislation to review the position
of other sectors. (Paragraph 111).
The definition of renewable energy for the purposes
of the Renewables Obligation is laid out in the Electricity Act
(as amended by the Utilities Act 2000). It was decided after extensive
parliamentary debate to exclude from the definition electricity
generated from a nuclear or fossil fuel source. Careful consideration
was also given to exempting CHP from the supply base on which
a supplier's Obligation is calculated but such a measure would
be beyond the powers granted by Parliament in the Utilities Act
to promote electricity from renewable sources.
CHP is, however, a vital part of the Government's
climate change strategy. DEFRA will be publishing the Government's
draft CHP strategy for consultation very shortly. This will set
out options for supporting CHP in the light of the Government's
target.
COMBINED
HEAT
AND
POWER
(CHP) OMBINED HEAT AND POWER
(dd) We trust that the Government's strategy for
the Combined Heat and Power Sector will be produced very soon:
firm priorities need to be established in the industry's 'shopping
list', and a clear indication from Government as to how it intends
to assist the industry would in itself be helpful in restoring
confidence. (Paragraph 114).
(ee) If the Government's target of 10GWe of CHP
production by 2010 is to be met, more radical action needs to
be taken. Adjustments to NETA, even if they are eventually agreed
to, will take some time to implement: changes to the Climate Change
Levy would be quicker to introduce and would provide a useful
signal to the market. (Paragraph 120).
The Government recognises the interest in the draft
CHP Strategy which will be issued for consultation very shortly.
It will include a range of measures to stimulate growth in the
UK's CHP capacity and help meet the Government's target. The Government's
response to Ofgem's report on the impact of NETA, together with
the PIU's Energy Review, will be reflected in the draft Strategy.
The Government recognises the difficult market conditions
now facing operators of CHP systems as a result of recent changes
in energy prices. The Chancellor of the Exchequer announced in
the Budget that, (subject to EU State Aids rules clearance), all
the energy used and produced by Good Quality CHP systems will
now be exempt from the Climate Change Levy. This recognises the
environmental benefits of CHP and will provide a further incentive
for business to use this technology.
CLIMATE
CHANGE LEVY
(ff) As for the pleas from other sectors for exemption,
we revert to our conclusion that, even while not prescribing the
fuel mix or picking winners, prudence may dictate at the least
that the Government does not unnecessarily or simply by default
close off options. We therefore recommend that the Departments
involved give further consideration to whether the provisions
of the Levy could and should be changed in favour of these sectors.
(Paragraph 121).
The objectives of the climate change levy are to
encourage all sectors of business and the public sector to improve
energy efficiency, and to support the development of new forms
of renewable energy. The Government would not be in favour of
any change to the levy which adversely affected achievement of
these objectives.
(gg) We recommend that the Government review the
operation of the Levy after it has been in force for a year and,
in particular, that the review team look closely at the arrangements
for Climate Change Agreements to ensure that they are as fair
as possible and that bureaucracy is minimised. (Paragraph 122).
The Government agrees that it will be important to
monitor how the levy is working in practice. It has been keeping
in close touch with business to gauge early experience with the
levy during its first year of operation. The Government is committed
to evaluating the environmental impact of the levy package of
measures once sufficient data is available, including uptake of
the support for energy efficiency improvements.
The Government has designed the Climate Change Agreements
(CCAs) for energy intensive industries to ensure that they are
as fair as possible, with the participating sectors working towards
challenging energy saving targets in return for receiving an 80%
levy discount on their eligible energy use. The Government has
endeavoured to keep bureaucracy to an absolute minimum, consistent
with adequate monitoring of the agreements, and has adopted a
flexible approach in dealing with the individual trade associations
handling the sector agreements.
The complexity of the agreements is largely in response
to requests from sectors during negotiations for the inclusion
of features to deal with specific practical issues. However, the
Government keeps the operation of the agreements under close scrutiny
to minimise burdens on sector bodies and participating companies
and, generally, to reduce bureaucracy. For example, the Government
has recently simplified the process for notifying variations to
agreements and is working with sector representatives to ensure
that there is a satisfactory interface between the agreements
and the UK emissions trading scheme. In particular, we are seeking
to ensure that the position of smaller companies is taken into
account and to avoid duplication of data verification processes.
TRANSPORT
Transport
(hh) We are encouraged that the Government is
showing strategic thinking on the issue of alternatives to petrol-
and diesel-driven road vehicles. We commend the work of the DTI
on road fuel gases and biodiesels. We are also pleased to note
the recent publication (in December) of a draft Government strategy
for the promotion of newer technologies, such as fuel cells, which
represents a welcome step forward in the area of strategic planning
of energy requirements, and a good example of inter-departmental
co-operation. (Paragraph 126).
The Government welcomes the Committee's endorsement
of its active exploration of alternative fuels and vehicle technologies.
As well as the 20p/litre reduction in the duty on biodiesel to
be introduced shortly, the Government has initiated pilot projects,
supported by duty exemptions, covering hydrogen, biogas and methanol,
under the 'Green Fuel Challenge' programme. Government has also
identified bioethanol as another promising alternative fuel, and
there will be a further round of the Challenge shortly. The Government
welcomes the Committee's commendation of the work of the Alternative
Fuels Group on road fuel gases and biodiesels, which it sees as
a good example of cross-Government working to support an HM Treasury
initiative. The Government is also encouraged by the Committee's
supportive comments on the cross-Departmental 'Powering Future
Vehicles' Strategy, on which it is currently consulting industry,
consumer, environmental and other stakeholders. As well as the
fuel cell technologies which the Committee notes, the Strategy
is designed to promote the development and introduction of more
immediate technical developments such as hybrid (internal combustion
and electric) technology, now beginning to reach the vehicle marketplace,
which offer substantial reductions in fuel use and carbon emissions,
but will also help bring forward the key vehicle technologies
which will also be needed for mass-market exploitation of fuel
cell technology.
(ii) We recommend that Ministers ensure that vital
issues such as the role of transport in energy policy are not
neglected because they fall between Departments. (Paragraph 127).
The Government recognises both the crucial links
between transport and energy policy, and the need for cross-departmental
working. Its creation of the Ministerial Group on Low Carbon Vehicles
and Fuels, bringing together DTI, DTLR, DEFRA, Treasury and devolved
administration ministers, will ensure that these crucial issues
are in no danger of 'falling between Departments'. The Ministerial
Group will publish a report to Parliament yearly, reviewing progress
on the implementation of the Powering Future Vehicles Strategy.
NUCLEAR
INDUSTRY
Nuclear Industry
(jj) The transfer of the historic radioactive
waste management liabilities should decrease the cost of nuclear
generation, at least as far as the British Nuclear Fuels fleet
is concerned. It remains to be seen
— and will doubtless take some months to
become apparent — whether relieving the industry of these
liabilities will actually change public perception
of the industry and encourage investment. (Paragraph 135).
The Government notes the Committees comments. Improving
management of the nuclear legacy could change public perceptions
of the industry but any changes are likely to become apparent
only over the long term. Magnox stations will continue to be operated
on a basis which recognises the need to minimise the cost to the
taxpayer of future decommissioning.
(kk) It is essential that there be no further
delay in government decision-making; the Government should make
a clear statement on the future of nuclear energy as quickly as
possible. (Paragraph 136).
This issue will be addressed in the forthcoming White
Paper.
COAL
INDUSTRY
Coal industry
(ll) There is no doubt that unless urgent action
is taken to sustain it, coal-fired generation will end in this
country. Moderate Government investment in a demonstration plant
— as recommended by our predecessors — might help
to sustain coal-fired electricity generation, at a comparatively
low cost to the Exchequer. At the very least, it might encourage
those electricity producers currently considering investing in
Flue Gas Desulphurisation for either existing or new plants to
go ahead. We therefore endorse the recommendations of the previous
Committee. (Paragraph 140.)
The recently published Review20[20]
of the case for Government support for Cleaner Coal Technology
Demonstration Plant recognised that the main challenge is now
reducing CO2 emissions, given that technologies to
manage SO2 and NOx emissions are now well
established and already installed in some coal-fired plant around
the UK. The Review concluded that there is a respectable case
for modest government support to help the development of some
supercritical components suitable for retrofitting to existing
conventional plant, on the basis that the risks involved in being
the first to adopt such components are currently such as to deter
the generators from committing to a project. Domestic reference
plant would also be helpful for exporters selling into countries
such as China and India.
(mm) It seems that a full examination of the international
research on carbon storage should be undertaken as part of the
process of deciding about the long-term future for coal-fired
plant. (Paragraph 142)
The Cleaner Coal Technology Review concluded there
is a strong case for fully assessing, in a systematic way, the
legal, scientific, engineering and economic aspects of geological
CO2 capture and storage. Carbon dioxide from coal-fired
generation as well as from other industrial activities could be
stored under the North Sea and initially used for enhanced oil
recovery. However, an assessment needs to precede any further
analysis of the policy case for government support for steps to
use CO2 in this way. The Department is currently initiating
this assessment and expects to make recommendations to ministers
by the end of the year on the further development of policy. As
a minimum, the assessment will cover the implications of the London
and OSPAR conventions, probabilistic analysis of engineering and
associated environmental risks, and an analysis of the existing
empirical evidence on gas migration from pressure and seismic
monitoring. This work will take in the international research
and experience accumulated to date, for example in the Sleipner
field of the Norwegian Sector of the North Sea and the Weyburn
project in North America.
(nn) We note Coalpro's view that any financial
support for clean coal technology — such as the suggested
obligation — may need to be only temporary, as rising gas
prices may make clean coal economically viable. However, a mechanism
like the proposed obligation would raise electricity prices until
then. The Government must take a view about whether the benefits
to security of supply arising from continued coal-fired generation
would be worth the cost. (Paragraph 143.)
The Cleaner Coal Technology Review examined the case
for the development of instruments to provide incentives for significant
reductions in CO2 emissions, whether these be from
coal or other sources. A number of responses to the Review's consultation
argued strongly that there should be a "cleaner coal"
or "sustainability" obligation, along the lines of the
Renewables Obligation, to make investment in Cleaner Coal Technology
plant attractive. It concluded that the main issue was whether
carbon management instruments designed to encourage carbon savings
could be reconciled with the extra cost to the consumer. Consumer
costs and the number of policy and practical obstacles to such
an approach led to the conclusion that this was not an attractive
option.
RENEWABLE
POWER TECHNOLOGIES
Renewable power technologies
(oo) We note that some forms of Government support
like capital grants are not of equal assistance to all renewable
technologies. We draw the relevant Departments' attention to this
problem and recommend further discussions on measures that might
be taken by them to ensure an even-handed approach to assistance.
(Paragraph 145)
Some forms of current government support for renewable
technologies differ between the different technologies. The differences
in the levels of support for different technologies reflect the
different stages of development between technologies. Wave power,
for example, is at an earlier stage of development than biomass
and wind power, and therefore the balance and nature of support
will be different, focusing initially on developing and proving
the technology rather than supporting widespread deployment. The
amount, level and type of support required will vary with the
status of each technology over time and future support for each
will be dependent on the progress that is made towards full deployment
of the technology.
(pp) We agree that the Government should
not try to 'back winners' among renewables technologies, but we
believe that it should display commitment to helping with the
launch of those technologies unlikely to benefit from the Renewables
Obligation. This might include help with development costs and
with market stimulation programmes. (Paragraph 146).
The Government is putting in place a number of measures
to support the launch and development of renewable technologies.
Around £10 million has been allocated to support 'blue skies'
research into new technologies through the Research Councils.
The DTI operates a research and development programme for the
pre-commercial development of renewable technologies, with a current
budget of £18 million a year. Capital grant schemes are being
put in place to support the deployment of offshore wind, biomass,
photovoltaics, wave and tidal schemes, with £180 million
available over the next three years. Community projects are also
being supported under a £10 million scheme, and the development
of advanced metering and control systems has been allocated a
further £4 million. In total, some £266.5 million has
been allocated by the Government to support the development of
renewables technologies.
In addition to this direct support, the Government
has recently established a business support unit, Renewables UK,
based in Aberdeen, to support the development of the UK renewables
supply chain, to ensure that UK business is best placed to make
the most of the opportunities that the Renewables Obligation offers,
and to encourage exporting. There is a strong parallel with the
creation of the Offshore Supplies Office in the 1970s. The Government
is also funding the Low Carbon Innovation Programme of the Carbon
Trust, which seeks to provide a flexible support framework for
a range of applications from blue-sky research through to near-market
exploitation.
(qq) We understand that a minimum of 600,000
tonnes of coal mine methane is escaping into the atmosphere from
abandoned coal mines in the UK every year. It seems to us desirable
on these grounds alone to explore whether some form of support
could be extended to encourage the use of this gas. Least-cost
options to the tax payer would be an extension of the Renewables
Obligation and/or exemption from the Climate Change Levy. (Paragraph
147).
Methane emissions from abandoned coal mines are not
currently included in the UK's greenhouse gas inventory. This
was on the advice of the Watt Committee on Energy, which assumed
these emissions were negligible based on information available
in the early 1990s. However, the Government recently asked AEA
Technology to provide an update estimate of emissions. They found
that emissions could range from around 20,000 tonnes to as much
as 300,000 tonnes per year, although the estimates are highly
uncertain. The Government plans to carry out more research to
reduce the uncertainty of the estimate and to include methane
emissions from abandoned mines in future UK inventories.
As recognised in the Report the government is investigating
ways in which it can assist the Coal Mine Methane industry. The
industry is being kept informed on progress for each of the possible
instruments being considered. In the recent Budget it was announced
that, subject to EU state aids clearance, electricity generated
by coal mine methane would be exempted from the Climate Change
Levy.
ENERGY
EFFICIENCY
(rr) We note that at present the House of Commons
is considering a Bill called the Home Energy Conservation Bill,
which seeks not only to impose tighter obligations on local authorities
(not least in reporting what they are actually doing to promote
energy efficiency) but also to tackle the landlord/tenant problem
mentioned above. We welcome the all-party support for this Bill.
(Paragraph 154).
(ss) It would clearly be politically difficult
for the Government to use fiscal instruments to curb domestic
consumption. If energy savings are to be increased in the domestic
sector, they must initially be achieved by means of greater promotion
of the benefits of energy efficiency, insulation and by raising
minimum standards for buildings and appliances. We recommend that
the various interested Departments — the DTI, DEFRA and
HM Treasury — look at the range of options (both carrots
and sticks) for raising energy efficiency standards, and come
forward with proposals as soon as practicable. (Paragraph 156).
The PIU Energy Review recommended various measures
to improve energy efficiency in the domestic sector — in
particular, that Government develop a Strategy for Home Energy
Efficiency. The Government will consider very carefully both the
PIU's suggestions and this recommendation by the Committee, and
will respond in a White Paper later this year after a period of
public consultation. We are already taking forward work that could
underpin a Domestic Energy Efficiency Strategy, including research
work on possible fiscal incentives. We are also undertaking a
review of the role of local authorities in energy efficiency policy
and programmes in the domestic sector.
In the meantime the Government continues to recognise
the cost-effective potential for energy efficiency in the domestic
sector. We are already investing significantly in improving energy
efficiency in the domestic sector and working on the development
of a number of relevant policy initiatives. These include:
_ sponsorship
of the Energy Saving Trust which promotes the sustainable and
efficient use of energy in the domestic and small business sectors;
with around £25million a year of Government funding;
_ the Energy
Efficiency Commitment introduced on 1st April 2002,
for three years, which places an obligation on gas and electricity
suppliers to make energy efficiency improvements through measures
provided to domestic consumers;
_ over £600
million from 2000 to 2004 to combat fuel poverty through the Home
Energy Efficiency Scheme, now marketed as the Warm Front Team;
_ £50
million for community heating and combined heat and power through
the Community Energy Programme in the next two years;
_ amendments
to the Building Regulations which came into effect on 1st
April 2002, and which will significantly improve the energy efficiency
of the housing stock. For example, all new properties now have
to display a Standard Assessment Procedure (SAP) rating. This
will provide prospective purchasers with information on the likely
energy costs of the property. The Government is also committed
to extending this scheme to existing property through the provision
of SAP rating information in the 'Home Seller's Pack', when a
legislative opportunity arises.
The Government also continues to work closely with
key stakeholders including industry, consumers, the Energy Saving
Trust and the Carbon Trust, via the Market Transformation Programme,
to identify and deliver integrated strategies, action plans and
the specific policy measures necessary to improve the efficiency
of the UK stock of domestic appliances, lighting, heating and
other end-use equipment. In particular, effective voluntary and
mandatory measures including consumer information (labelling)
and both mandatory and voluntary minimum energy efficiency requirements
have already been introduced at EU level. These are removing the
least efficient domestic boilers, refrigeration appliances, washing
machines, dishwashers and fluorescent lamp ballasts from the market,
and reducing the power consumption of televisions, video cassette
recorders, digital TV equipment and power supplies, with a particular
focus on stand-by mode power consumption. The Government will
strongly support the review and development of further EU measures
where that is the most cost-effective action.
(tt) Micro-CHP does appear to have the potential
to contribute to energy saving. However, we suspect that, in their
enthusiasm, some witnesses may have under-estimated the difficulties
of connecting micro-CHP to the distribution system safely and
in such a way as to maintain security of supply on the network
and for individual consumers. Moreover, we understand that there
are considerable problems in ensuring an appropriate match between
heating and electricity needs at a domestic level. The technical
problems for smaller units need to be addressed before micro-CHP
can be widely adopted. We do not dismiss the potential of CHP;
we just wish to record a caveat. (Paragraph 159).
The Government acknowledges that these issues will
need to be satisfactorily resolved before micro-CHP can fulfil
the great potential which it appears to offer. The Government
is already carrying out work to investigate the benefits of and
possible barriers to introducing micro-CHP, through the Government/industry
Distributed Generation Co-ordinating Group. A micro-CHP pilot
was announced under the 'Warm Front' Team (formerly Home Energy
Efficiency Scheme) when the UK Fuel Poverty Strategy was launched
last November. The Government intends to invite micro-CHP manufacturers
to take part in a large-scale pilot to test the suitability of
the technology for use in fuel poor households. The intention
is that a total of up to 6,000 installations will be carried out
over a 3-year period likely to begin in early 2003. If successful,
the intention is to offer this through the Home Energy Efficiency
Scheme (now marketed as 'Warm Front') from 2005-06. Clearly, the
pilot will need to address technical problems, including connection
of micro-CHP to the distribution system. In addition the Chancellor
announced in the Budget a reduction in the VAT rate to 5% for
micro-CHP units installed under grant-funded schemes in the domestic
sector and the completion of the exemption of Good Quality CHP
from the climate change levy, thus ensuring that Good Quality
CHP used on site, sold direct and sold indirect will be exempt
from the levy. The decision recognises the environmental benefits
of all Good Quality CHP and will give the CHP sector, which has
been hard hit recently by falling electricity prices and rising
gas prices, a much needed boost.
(uu) We do not know whether the Energy Technology
Support Unit has sufficient resources to expand its work, if demand
is there, but we recommend that the Department look into this
matter and, if possible, publicise the work of the unit to a wider
audience. (Paragraph 160).
The Energy Technology Support Unit (ETSU) is a private
company, now part of AEA Technology's Future Energy Solutions.
It is one of a number of contractors to the Government for work
to promote energy efficiency. The Energy Efficiency Best Practice
Programme, which is the UK's main energy efficiency information,
advice and research programme for organisations in the public
and private sectors, was formerly managed for the Government by
ETSU and is now being overseen by the Carbon and Energy Savings
Trusts and implemented by a range of specialist sub-contractors.
The Energy Saving Trust (EST) and Carbon Trust (CT) receive around
£60 million from DEFRA to promote domestic, business and
public sector energy efficiency and the take-up of low carbon
technology.
STRATEGIC
ENERGY
AUTHORITY
(vv) We are not convinced of the need for the
creation of a strategic energy authority. However, we strongly
urge the Government to put in place a more transparent structure
for the formal co-ordination of energy policy development and
implementation across Government. In the absence of a strong formal
structure, we cannot see how the responsibilities of the Energy
Directorate of the DTI could be dispersed throughout that Department
in the way envisaged in the recent departmental restructuring
proposals. (Paragraph 166).
Following a review in 2001, DTI is experiencing a
process of change. Its role will be to work with business, consumers
and employees to drive up UK productivity and competitiveness.
The first changes in the structure of the Department, and the
way it works, were implemented on 4 March 2002. Decisions on the
role of the Energy Group within DTI, taking into account the PIU
review and other factors, will be taken and implemented by 2004.
The Government recognises that the cross cutting
nature of energy policy needs to bring key players together and
underpin policy making with analysis. Recent developments such
as the Ministerial group on Low-Carbon Vehicles and Fuel and the
Interdepartmental Analysts Group's report on long term reduction
in greenhouse gas emissions are clear examples of increased cross-departmental
working. The wide nature of the PIU report means that taking the
issues forward to a White Paper will necessitate further close
interdepartmental working. The core team preparing the White Paper
already includes officials from both DTI and DEFRA, and other
Departments are also involved with the work. The team is also
looking further at the PIU's recommendation on a new Sustainable
Energy Policy Unit.
May 2002
2 www.dti.gov.uk/energy/gasnetworks/index.htm Back
3
www.dti.gov.uk/energy/egwg/index.htm. Back
4
www.ofgem.gov.uk/docs2002/26distributedgeneration.pdf Back
5
www.dti.gov.uk/energy/west_coast_interconnector_study.pdf Back
6
Energy Projections for the UK, Energy Paper 68, DTI, November
2000 Back
7 7 Report
available on the DTI website, www.dti.gov.uk/energy/greenhousegas/index.htm Back
8 8 www.pilottaskforce.co.uk/new_doclib/pilotannualreport2001.pdf Back
9 9 www.ofgem.gov.uk/docs2002/ngtafeb2002.pdf Back
1 10 0 www.dti.gov.uk/energy/pdf/neta_resp.pdf. Back
1 11 1 www.planning.dtlr.gov.uk/consult/greenpap/greenind.htm Back
1 12 2 www.planning.dtlr.gov.uk/consult/majinfra/index.htm Back
1 13 3 PPG
22, www.planning.dtlr.gov.uk/ppg/ppg22/pdf/ppg22.pdf Back
1 14 4 There
will also be an associated Overall Standard. Back
1 15 5 www.dti.gov.uk/energy/fuelpoverty/index.htm Back
1 16 6 www.dti.gov.uk/renew/condoc/energy.pdf. Back
1 17 7 www.dti.gov.uk/renew/condoc/support.pdf Back
1 18 8 www.dti.gov.uk/renew/condoc/n_rpros.pdf Back
1 19 9 www.dti.gov.uk/renew/ropc.pdf
and www.dti.gov.uk/renewable/pdf/energymaster.pdf. Back
2 20 0 www.dti.gov.uk/cct/cctdemohome.htm Back
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