energy and climate change priorities for the … · setting the bar energy and climate change...

SETTING THE BARENERGY AND CLIMATE CHANGE PRIORITIES FOR THE GOVERNMENT

EXECUTIVE SUMMARY

Steady progress towards this vision was made under the coalition government. The 2013 Energy Act – the key piece of legislation to transform our power sector – was put in place with overwhelming support across political divides, and more than £45 billion has been invested in our energy infrastructure. We also saw the launch of the world’s first ever Green Investment Bank and a crucial deal to set an ambitious long-term target to cut emissions across Europe.

However, the job is not complete. It is now absolutely critical that the new government stays the course and builds on this progress in order to inspire confidence among business and consumers.

Most importantly, now is a time for a period of enduring stability. With energy politics all too often trumping energy policy in recent times, business will be keen to see that

trend reversed – particularly in light of new risks, in the form of a referendum on the UK’s EU membership and on-going questions about the shape of our union. With this in mind, we need to see the new Secretary of State stick with what’s working in areas such as Electricity Market Reform, and ensure a laser focus on implementation, rather than seeking to unpick carefully constructed policy. With the UK’s energy security position set to reach a historically tight point this winter, this couldn’t be more critical.

As well as stability, business will also welcome ambition. For example, the international negotiations in Paris at the end of this year present a perfect opportunity for the UK to use its influence within Europe to drive forward a once-in-a-generation global deal, creating huge opportunities for business both at home and abroad.

Business has a clear vision for the UK’s energy and climate future – one where greening and growing the economy go hand in hand. We want to see resources used more efficiently and strong progress towards a diverse range of energy sources which keeps our system secure and sustainable, while also keeping costs manageable. And in doing so, we must ensure this is a pro-enterprise transition with competitiveness at its heart – allowing industry to innovate, drive new markets and create jobs to give the UK a leading edge.

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Finally, we must ensure we take everyone with us on the low-carbon transition. This means having a keen eye on the cost-effectiveness of policies and working to ensure that both new and existing industries can create a sustainable and competitive role in a low-carbon economy. It also means having an honest debate with the public about our energy future – one which is clear about both the costs and the benefits. Energy efficiency presents a real opportunity for businesses and households to take control of their energy futures, but for far too long has been a poor relation in the energy debate. It must be placed at the top table in this Parliament.

Achieving all this will take astute political leadership, as well as a collaborative and consensual approach. The government must, in its first year set the bar and start as it means to go on if it is to turn this vision into a reality.

Stick with plans to drive investment in a secure and diverse energy mix

Play a strong role in Europe and internationally to support UK investments and drive global low-carbon markets

Put consumers at the heart of the energy debate, helping them to take control of their energy future

Support an efficient, competitive and innovative low-carbon industrial base

THE NEW GOVERNMENT MUST:

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Stick with plans to drive investment in a secure and diverse energy mixWith the UK energy market going through its biggest transformation since privatisation, the government must ensure a period of stability in the policy framework in order to attract the necessary private sector investment in a range of energy sources. It must also be clear on its long-term ambition, and how this will be met in the most cost-effective way. Alongside this, we must also continue to maximise the UK’s indigenous oil and gas supplies, which will play an on-going role as we transition to a low-carbon economy.

We must build on progress to date in transforming the UK’s power sector…The UK is facing a major energy investment challenge, with £100bn of private sector capital needed by 2020 across a range of fuels and technologies – including nuclear, renewables, gas and Carbon Capture and Storage (CCS) – in order to secure and decarbonise our energy supplies.1 Good progress was made over the last Parliament to put in place the foundations for a stable and transparent framework to attract this level of investment, with the passing of the Energy Act and implementation of Electricity Market Reform. The government must now build upon and fine-tune this framework for the future, taking timely decisions which will drive investment across all sources.

There are some immediate actions that the new Secretary of State must take. One will be to drive forward the deal on Hinkley Point, allowing construction to get started on the first new nuclear plant to be built in a generation. Furthermore, following the announcement of the early closure of the Renewables Obligation scheme to onshore wind farms, the government must work closely with industry to get the details right on how it intends to implement its manifesto pledge in order to minimise the impact on investor confidence. Moreover, clarity will be needed on how the government will align its decarbonisation and cost-effectiveness ambitions in light of this decision.

A further priority must be to provide continuing certainty for investors by extending the Levy Control Framework (LCF) – the overall budget for low-carbon energy incentives – beyond its current horizon of 2020/21. This is crucial for those projects, such as offshore wind or Carbon Capture and Storage, which require a longer-term policy outlook. This means the LCF should be set for a further 7 year period and extended on a rolling basis thereafter, in a way that is transparent and consistent with both the UK’s decarbonisation ambition and its commitment to cost-effective deployment.

As well as setting this long-term ambition, the government should also look to make near-term refinements to the policy framework, learning lessons from the first auctions for the Capacity Market and Contracts for Difference (CfDs) – both key tenants of Electricity Market Reform – to improve the process going forward. One immediate modification would be to provide more foresight of CfD budget allocations, in order to provide greater confidence for those looking to bid into the next round. Similarly, visibility of administrative CfD ‘strike prices’ beyond those set out to 2018/19 would provide assurances for investors in projects which will be commissioned after that date. For the Capacity Market, the government should seek to provide clarity on the role of Demand Side Response within the next auction, in order to realise its full potential.

4 Setting the bar: Energy and climate change priorities for the government

…while continuing to maximise the UK’s indigenous suppliesWhile investment in the power sector will be an on-going feature for many years to come, this must sit alongside continued maximisation of our oil and gas supplies, which will remain of importance as we transition to a low-carbon economy. The recent fall in global oil prices has refocused political attention onto the future of the UK Continental Shelf (UKCS). Having taken helpful action in the previous Parliament to reduce the headline tax rate in the North Sea, the commitments in the new Energy Bill around the regulatory regime are welcome, and must be pursued as part of a strategy aimed at maximising economic recovery in the UKCS over the long-term and maintaining the competitiveness of the sector. Unconventional oil and gas also represent a real opportunity for the UK to boost its indigenous production. While sources such as shale gas should not be viewed as a silver bullet, we welcome the government’s commitment to supporting its development as part of a future energy mix.

Over the long term, developing Carbon Capture and Storage technology can create a sustainable role for fossil fuels in our energy mix. Given its huge potential, the government must continue to work collaboratively with industry, the EU and other countries to make progress towards wide-scale and cost-effective deployment of CCS beyond the current demonstration projects.

Set the Levy Control Framework for the period beyond 2020/21

Embed and refine Electricity Market Reform by providing greater foresight of budgets for CfD allocation rounds, setting administrative strike prices beyond 2018/19 and providing clarity on the role of Demand Side Response in the Capacity Market.

Work with the oil and gas industry to maximise recovery of both onshore and offshore reserves

Progress the development of cost-effective Carbon Capture and Storage at pace and at a scale that goes beyond the current demonstration programme

RECOMMENDATIONS:

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The UK must engage constructively to shape EU energy and climate change policy…The UK has consistently led from the front on European energy and climate change policy, and must continue to be a positive, pragmatic and principled voice on this agenda going forward. Importantly, while the government seeks to renegotiate the UK’s position in Europe and offer a referendum on continued membership, it is essential that it engages constructively and proactively within the EU during this time.

One such issue where the UK will need a strong voice is on reform of the EU Emissions Trading System (EU ETS), which business believes should remain as the cornerstone of Europe’s attempts to decarbonise. With the legislation on the Market Stability Reserve – intended to enable the system to withstand future economic developments – having been agreed, it is vital that the focus is now on reforming the EU ETS over the long-term. This means progressing legislation this year to set an emissions cap for Phase IV of the EU ETS from 2021-2028 in line with the EU’s overarching 40% emissions reduction target for 2030, and ensuring that it works for all businesses by providing the necessary support for the industries most at risk of ‘carbon leakage’ (i.e. when industries choose to relocate production to countries with fewer environmental policies and costs).

Progressing the concept of an Energy Union is another priority for the UK business community, presenting an opportunity to forge greater links between European markets and create a more efficient pan-European energy system, while promoting security and affordability for consumers. The government should therefore work closely with its European partners to create more open and flexible markets, for example by completing the internal energy market and improving interconnection between countries, while ensuring that Member States are able to maintain strategic control of their energy supply.

Play a strong role in Europe and internationally to support UK investments and drive global low-carbon markets In order to support positive investment decisions in the UK, strong action will also be needed beyond our borders. In Europe, we must see a constructive approach to shaping the energy and climate agenda, demonstrating the UK’s positive influence within the EU. We must also grasp the opportunity to secure an ambitious and durable international climate deal in Paris this year, supporting the growth of global low-carbon markets and enabling business to operate on a level playing field.

In Europe, we must see a constructive approach to shaping the energy and climate agenda, demonstrating the UK’s positive influence within the EU.


…and promote bold action at the UN climate change negotiations in ParisClimate change is a global problem which requires collective action, and the new government should work with its European and international partners to secure a strong and ambitious agreement at the Paris UN climate change negotiations in December 2015. Indeed, while European leadership on climate action is welcome, it is important to note it accounts for only 11% of global emissions, meaning that acting alone over the long-term will have a limited impact on global warming.2

Success in Paris will be measured by leaders’ ability to make meaningful progress in three key areas where the UK should promote solid action. Firstly, the government must work towards delivering a robust legal framework for global emissions reduction which is ambitious and equitable, with everyone taking their fair share of the burden. Furthermore, we should push for a mechanism whereby national commitments can be ratcheted up on a regular and predictable basis, without the need to repeatedly return to the drawing board for full treaty negotiations. Secondly, Paris must deliver a basis for the expansion of carbon pricing, building on the current momentum, which has seen almost 40 national and over 23 sub-national carbon pricing regimes either in action or scheduled. Finally, it should facilitate the global flow of finance and innovation, accelerating collaboration between countries to advance the game-changing technologies upon which our low-carbon futures depend.

Lead attempts to secure holistic and long-lasting reform of the EU Emissions Trading System and play a central role in shaping EU policy on the Energy Union

Work with European and international partners to build momentum and secure a strong and durable UN climate change deal in Paris

RECOMMENDATIONS:

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Improving trust, competition and consumer engagement in the energy market is critical…The UK has one of the most competitive energy markets in Europe, with a track record of delivering good outcomes for consumers, however it is clear that there has been a breakdown of trust between industry, consumers, the regulator and politicians. This is in part a result of the fact that the public doesn’t necessarily understand how the UK’s energy objectives relate to each other or the bills they pay, leading to a lot of misunderstanding and mistrust, and this must be addressed.

For industry, rebuilding confidence is paramount, and the Competition and Markets Authority’s investigation into the energy market presents an opportunity to identify where improvements may be needed and draw a line under this debate. The government’s commitment to implement the CMA’s findings is therefore welcome, setting an important precedent for any market interventions being made on the basis of independent evidence. One area already identified by the CMA as a challenge is that of ‘sticky customers’ i.e. those that do not actively participate in the market. With this in mind, business supports the government’s ambition to make switching between suppliers easier, and would look to pursue solutions which ensure that consumers can make informed choices. The introduction of Smart Meters has an essential role to play in achieving this, as

well as helping to put consumers in the driving seat in terms of their energy usage, and the government should continue with its commitment to cost-effective rollout.

…but energy efficiency holds the greatest potential to help households take control of their billsWhile competition in the energy market is important, to have a sustainable impact on consumer bills, a much greater emphasis should be placed on improving the efficiency of the UK’s housing stock. CBI polling conducted last summer showed that support for energy efficiency among consumers is high, with over a third agreeing that it is the best way to tackle rising energy costs, yet we have failed so far to help translate this consensus into widespread action.3 Energy efficiency must therefore move up the political rankings in this Parliament, and be seen as a critical infrastructure priority under which a refreshed, long-term policy approach is taken.

An urgent action for the new Secretary of State will be to consider a successor to the Energy Company Obligation (ECO), the main policy for subsidised energy efficiency measures. While the scheme has been successful in delivering its objectives, it has been challenged by complex design and uncertainty – with the policy due to end in 2017, the new government has a real opportunity to develop an improved replacement that is long-term,

Put consumers at the heart of the energy debate, helping them to take control of their energy futureWith rising energy bills a long-term reality, it is important that consumers understand what they are paying for and why – in particular, a better public understanding is needed of the costs and benefits of the low-carbon transition. With this in mind, greater efforts are needed to put people in control of their energy future. A crucial step is to ensure a dynamic and competitive market in which consumers can easily engage, which should be complemented by a clear plan to tackle the energy efficiency challenge.


cost-effective, simple and, importantly, targets limited subsidy towards the fuel poor and those on low incomes. It is crucial, however, that the transition to a new regime provides sufficient lead-in time so as to avoid a hiatus that could be particularly damaging to the supply chain.

With future subsidy for energy efficiency measures best targeted at vulnerable households, a compelling offer for those able to pay for their improvements is also needed. To date, the main policy, the Green Deal, has overpromised and underachieved, with only around 13,000 Green Deal Plans currently being progressed – a far cry from the original ambition to insulate 14 million homes.4 Business continues to support the Pay As you Save (PAYS) principle, but it is clear that strong action is needed to make it more attractive to consumers. Firstly, high interest rates remain a barrier, and options to reduce them, for example through the use of a government guarantee, should be explored. Furthermore, it is important to encourage a wide range of alternative finance options, such as a salary sacrifice scheme and the provision of green mortgages within industry, in order to suit customer preferences, fill the gaps in the current market, and reflect the range in price of different energy efficiency measures.

Finance mechanisms alone are not the answer to stimulating consumer demand, however, and a range of incentives and regulations should be explored in order to achieve this. Smart regulation, such as minimum energy efficiency standards in the Private Rented Sector (PRS), are part of this solution. Regulation must be balanced by effective incentives. For example, incentives that link energy efficiency to property value, using Stamp Duty or Council Tax, should be explored over the long-term.

Accept and implement the outcome of the Competition and Markets Authority’s investigation into the energy market

Make energy efficiency a national infrastructure priority and set out a refreshed, long-term policy framework, including:

- Designing a successor to the Energy Company Obligation, with sufficient lead-in time to implement the new scheme

- Addressing the key structural barriers to the take up of the Green Deal, and exploring a wider range of finance options in the able-to-pay market

- Explore a range of sticks and carrots aimed at stimulating demand in the energy efficiency market

RECOMMENDATIONS:

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A simplified policy framework is needed to unlock investment in business energy efficiency…With rising energy costs a challenge for businesses as well as households, using energy more efficiently presents a real win for UK plc, and many firms are already seizing this opportunity. Indeed, a survey conducted for the CBI’s 2013 report, Shining a Light, showed that around 80% of businesses cited energy efficiency as a priority, helping firms to improve their bottom line as well as future-proof themselves against longer-term energy price rises and volatility.5 There is also a growing trend of firms seeking to generate their own energy, through technologies like Combined Heat and Power (CHP), becoming more proactive players in an increasingly dynamic market.

However, businesses continue to face a complex web of overlapping and burdensome policies which can often deter, rather than encourage, investment in this area. This presents a particular challenge for small and medium-sized companies, many of which may not have a dedicated team with the expertise to navigate the policy landscape. With the new government committed to driving forward a deregulation agenda, there is an opportunity to work across all departments to set out a clear roadmap to simplify the business energy efficiency policy regime, with a view to unlocking investment and exports.

…while it is also crucial to help the UK’s most energy-intensive industries to thrive in a low-carbon economyWhile energy efficiency is a useful strategy for managing business’ energy bills, for many of the UK’s vital energy-intensive industries, much of the low-hanging fruit has already been picked, meaning that it is reaching its limits in terms of cost control. Furthermore, those that are competing on an international stage face a serious challenge to maintain their competitiveness, as their prices continue to follow a different trajectory to their counterparts. Indeed, power prices for heavy industry in the UK are already 50% higher than the EU15, and the reality of this is starting to bite, with examples of plant closures and redundancies in key industries over the past year.6

Over the course of the last Parliament, the government took the right approach in tackling this challenge by freezing the Carbon Price Floor (CPF), to minimise the divergence between the European and UK carbon prices, and providing compensation to vulnerable industries for the indirect policy costs they face. With policy costs set to increase from 20% of an industrial power bill in 2014 to 37% in 2020, it is important that the current levels of compensation are maintained in this Parliament, and that the government exempts energy-intensive industries from the forthcoming costs of Contracts for Difference.7

Support an efficient and competitive low-carbon industrial baseIt is crucial that the UK’s energy and climate change strategy is pro-jobs and pro-growth. Unlocking the business energy efficiency opportunity will be a key part of enabling firms to manage costs while contributing to the UK’s climate ambitions. Beyond this, a sustainable strategy is needed to help our most energy-intensive industries to stay competitive and thrive in a low-carbon economy.


While providing industry protection is necessary, it is not a sustainable solution, and a longer-term strategy is needed to help industry to not just survive in the coming years, but to thrive in the low-carbon transition. To do this, industry will rely on break-through technologies, such as Carbon Capture and Storage, so that they can decarbonise and remain competitive within the UK. However, progress on low-carbon innovation has been slow, and government must now pick up the pace. The government’s work on sectoral decarbonisation roadmaps out to 2050 is a good first step, and could be usefully aligned with its broader work on industrial strategy with a view to capturing the economic value of the low-carbon transition while maintaining a competitive low-carbon industrial base.

1. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/331071/DECC_Energy_Investment_Report.pdf

2. http://edgar.jrc.ec.europa.eu/news_docs/jrc-2014-trends-in-global-co2-emissions-2014-report-93171.pdf

3. http://www.cbi.org.uk/media/2830762/energy_brochure.pdf

4. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/428285/Monthly_Statistical_Release_-_GD___ECO_in_GB_May15_Final_.pdf

5. http://www.cbi.org.uk/media/934998/shining_a_light_-_uncovering_the_business_energy_efficiency_opportunity_cbi_report_aug_2013_screen.pdf

6. https://www.gov.uk/government/statistical-data-sets/international-industrial-energy-prices (Extra large inc. tax)

7. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/384404/Prices__Bills_report_2014.pdf

Set out a clear roadmap to simplify the energy efficiency policy landscape for business

Commit to continued support for energy-intensive industries, including maintaining current compensation packages and intended exemptions

Take forward the sectoral 2050 decarbonisation roadmaps, ensuring they are aligned with the government’s work on Industrial strategy – this should include efforts to develop industrial CCS

RECOMMENDATIONS:

REFERENCES

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For further information on this report, or a copy in large text format, contact:

Ross Gurdin Senior policy adviser

T: +44 (0)20 7395 8120 E: [email protected]

www.cbi.org.ukProduct code: 10994

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