Our Energy Challenge: Securing clean, affordable energy for the long term
Executive Summary
Reducing carbon emissions
- The government should continue to provide long-term support for the EU Emissions Trading Scheme (ETS) which, by building the price of carbon into the power price, provides support for all low carbon technologies. We believe that the targets should be bold and focus savings towards the top end of the 11-29m tonne range compared to baseline. We believe this is both achievable, and the only way to hasten the transition away from high polluting forms of power generation. The UK government should continue to aim for greater international agreement on climate change, and, within EU ETS, to set tough carbon targets and ensure that our European partners do the same.
- We also consider that government should take steps to ensure that currently excluded sectors (especially transport) are faced with the same or similar carbon reduction incentives to those which are already applicable in energy and other large industries.
- Government should continue to resist pressure for “technology picking” and/or a series of new and potentially over-lapping specific policy obligations. Where obligations already exist, as in the case of renewables, government should be mindful of investor confidence when changing the rules as this can destabilise the market, increase investor risk, and discourage new capital expenditure commitments.
- Offshore wind has faced some technology problems in early deployment and some further transitional support will be required. This will increase the economic efficiency of the Renewables Obligation.
- Within the context set, the Energy Efficiency Commitment (EEC) has been successful in delivering energy efficiency measures to the domestic sector but is very much an input, as opposed to output, based scheme. It is also effectively reliant on a limited range of measures to deliver the programme. Serious consideration should be given to enhancing EEC to make it a more flexible and efficient mechanism, capable of transforming domestic household energy consumption. This should include the separation of the social and environmental objectives, recognising and rewarding behavioural change, encouraging investment in, and inclusion of, new technologies, and a longer-term move to a wider carbon traded market, allowing greater flexibility to trade carbon.
- Fiscal incentives have an important role to play in stimulating consumer demand to invest in energy efficiency as the success of the British Gas Council Tax rebate scheme with Local Authorities has proven. The government should instruct Local Authorities to use the additional funding announced in the 2006 Budget to match fund the £50 per household that British Gas currently contributes towards the rebate.
Reliance on imported gas
- Dependency on gas is not in itself a problem, especially if there is diversity of source and supply routes. The market is already making considerable investments in new pipelines and import facilities and Centrica alone has committed £12bn to new gas contracts. However, as recent events have shown, infrastructure is a pre-requisite not a guarantee that gas will flow to the UK.
- Given the concerns there have been over the impact of the tight supply/ demand situation on industrial consumers, we recommend that explicit security of supply standards should be defined for all classes of firm gas customers, and that suppliers be made directly accountable to OFGEM for demonstrating their compliance.
- In order to ensure gas flows in an effective manner, government and OFGEM must ensure effective secondary markets and “use it or lose it” provisions for new infrastructure capacity to maximise gas flows into the UK. This is particularly important for pipelines, LNG, and storage infrastructure exempted from Third Party Access (TPA) under the Gas Directive. It is also important to have clarity on interpretation of “use it or lose it” for LNG import terminals.
- UK security of supply will be compromised if continental Europe does not fully liberalise. A failure to liberalise will also continue to contribute to higher prices for UK consumers. A study by Global Insight found that a failure to liberalise on the Continent, and break the oil link to gas contracts, would cost the UK around £10 billion in 2006.
- It remains critical that progress is made to liberalise energy markets in Europe to ensure there are no restrictions on gas flowing to the UK. In particular, it is important that there is proper implementation of unbundling and greater transparency in the European markets including information about gas flows, inventories and available capacities for third party access to pipelines and storage.
- We are increasingly concerned that industry consolidation on the Continent may further strengthen existing dominant positions in gas access to Belgium and thus to the UK interconnector. It is important that EU competition is not compromised by these mergers of national champions to the disadvantage of competition and UK consumers.
Storage
- We do not see any immediate need for strategic storage in the sense of a “stand by” reserve held for release in exceptional circumstances set by government. The market is focused on the immediate priority of developing more commercial storage and is delivering in this regard. A requirement to build strategic storage could deliver the opposite of what is intended, as players in the competitive market may reduce investment in their own storage facilities, including much needed commercial storage.
- We believe that the market will deliver increased commercial storage capacity. More LNG shipments will also help to provide increasing diversity and “virtual” storage. Government must create a planning environment that is more favourable to the construction of storage facilities and address prohibitive planning issues that have discouraged investment and delayed new storage coming on-line.
- More open, liberalised access to storage on the Continent combined with a more flexible approach from countries such as France (where there is a unduly conservative tendency to hold gas in their own storage rather than release it in response to high market prices), would also help to ease the UK situation.
Nuclear
- Under the present regulatory framework, it is likely that few public companies would be willing to invest in replacing the existing, or in building additional nuclear capacity and it will be important to address planning, licensing and waste issues.
- If the government chooses to support new nuclear build, then this should not be through further subsidies. Nuclear will gain the economic benefits of its low carbon intensity through the long term carbon market. We would not support a nuclear obligation as this would mean there is no longer a level playing field for other generation technologies such as Combined Cycle Gas Turbine (CCGT) , Carbon Capture & Storage (CCS), and microgeneration, or indeed, for investment in energy saving.
Microgeneration
- Microgeneration has the potential to deliver major improvements in household energy efficiency in the UK, although it will be important that the current market projections are reviewed as products are developed and delivered into the market. British Gas is exploring a range of microgeneration technologies including domestic combined heat and power, wind turbines and solar thermal panels.
- However, there are a number of significant regulatory barriers that need to be addressed around planning consents for domestic wind turbines and the production of electricity by domestic customers. Fiscal incentives may have a role to play in creating customer demand in these areas of discretionary spending.
Carbon Capture and Storage
- Carbon Capture and Storage should be eligible to take advantage of any steps being taken to establish long-term carbon contracts to help new and emerging technologies.
Fuel Poverty
- We believe that the current EEC programme has conflicting carbon and social objectives and does not provide sufficient focus on the fuel poor. With declining opportunities in the priority group, combined with an increased overall target in EEC3, we believe the current 50/50 allocation of activity between the priority and non-priority groups should be changed in the next phase of EEC. Separating the priority and non-priority elements of the EEC target, and increasing the share of the target allocated to the non-priority group, will enable the overall carbon objectives to be met, thus allowing a proportion of the priority group spend to be focused on 'softer' measures (eg. benefits health checks) which will contribute towards delivery of the government’s fuel poverty targets. The government should also consider directly linking payment of the winter fuel allowance to the utility bill.