Government action to incentivise energy efficiency and deliver deregulation

Niall Mackenzie, Head, National Carbon Markets, DECC

10 November 2011

Agenda

• Current policy landscape• Issues Ceramics industry faces – Govt view• Govt Action and Next Steps

The climate challenge

AddAd

Stott Nature 2004updated to 2007-HadGEM1

Heat waves like 2003:

• the norm by 2040

• mild by 2060

Source: Met Office Hadley Centre

4

• Carbon budgets = cut of at least 34% in greenhouse gas emissions in 2020 (1990 levels) .• 4th carbon budget (2023-2027) = 50% over the period relative to 1990 levels.• 2050 goal = 80%

Legally binding carbon budgets

350.0

400.0

450.0

500.0

550.0

600.0

650.0

MtC

O2e

Actual net UK carbon account Latest emissions projections (May 2011 CB4 IA)

Budget 1 indicative annual average Budget 2 indicative annual average

Budget 3 indicative annual average Budget 4 indicative annual average

Government action –framed by Carbon Budgets

Significant cost effective energyefficiency opportunities exist in non domestic buildings

Source: Carbon Trust 2009

35% CO2 reduction by 2020 with net benefit £4,5bn

70% CO2 reduction by 2050 at no net cost

Simple measures: lighting and heating control, energy management and behavioural change

More complex: Improvements to buildings fabric (e.g. Insulation) and energy generation

But is the same true for Energy Intensive Industry?

Ceramics Performance in CCAs – achievement of targets but trading required in one sub sector

In final milestone period of current CCA scheme (2010):

• 4 out of 5 of the sub-sectors passed after target adjustment (to reflect reduced output)

• 87% (528 kt) of the CO2 purchased was in the failed sub-sector

Ceramics improving energy efficiency and still scope for further improvement?

orCeramics at the limits of energy efficiency?

To be discussed in negotiation of CCA Target for 2013-2020

Regulations to encourage energy efficiency & reduce carbon emissions

• CCL (LPG, gas, coal & electricity consumption**)

& Fuel Duty (gas oil)

• EU ETS • (consumption of

fossil fuels)

• EU ETS • (electricity • consumed • from grid***)

• CRC

• CCA • (reduce

d CCL)

• Main policies directly affecting non-domestic* consumption of fossil fuels

& electricity

• * Industry, commercial and public sector, excluding offshore and refineries

• **Some exemptions apply, e.g. for CHP• ***EU ETS costs reflected in price of electricity consumed

from the grid along with cost of RO and FiTs•

Climate Change Levy – increases price signal on energy use for business & public sector – greater cost savings from energy efficiencyClimate Change Agreement – exemptions from CCL for energy intensive industry in return for meeting energy efficiency targets negotiated with GovtEU Emissions Trading System– market based enables heavy industry to decide whether to abate or fund other’s cheaper abatement across the EUCRC Energy Efficiency Scheme – increases price signal on energy use, public recognition of those improving energy efficiency performance via league table

• CRC Simplification “next steps” publication on 30 June -discussion with participants on those proposals continuing

• CCA consultation closed on 28 October - DECC considering responses

• Transposition of EU ETS regulations and small emitter opt-out – DECC discussing with industry via UK Emissions Trading Group how to deliver lightest touch

• Red Tape Challenge Environment theme (including regulation of industrial emissions) – online consultation closed in September – now reviewing feedback

• Red Tape Challenge Energy theme – online consultation 25 November to 30 December: www.redtapechallenge.cabinetoffice.gov.uk

Coalition Government committed to regulatory simplification

Publication set out proposals to:• provide greater business certainty• provide business with greater flexibility• reduce the administrative burden• reduce the complexity of the scheme• reduce overlap with other schemes.

By•Reducing the number of fuels covered by the scheme• Moving to fixed price allowance sales• Simplifying the organisational rules• Making qualification processes easier• Reduce overlap with other schemes• Reduce the administrative burden of evidence and records

“Simplifying the CRC: Next Steps” 30 June 2011

Consultation 2 September - 28 October sets out proposals to:• Harmonise & streamline data reporting and align with EUETS

timetable• Guarantee the rights of existing 54 sectors to remain in CCAs• Simplify Agreements & create common rules for all participants (to

be consulted on later this year) replacing 54 different sectoral “books”

• Replace trading with simple buy-out mechanism for participants’ risk management

• Greater site coverage• Co-locate administration with ETS & CRC in the Environment

Agency• Seeking views on whether to introduce a voluntary penalty

mechanism to avoid businesses losing CCL discount for minor infringements

Simplification Progress -Climate Change Agreements

Some of the challenges facing UK ceramics

• Tough economic climate• Competition for investment in UK plant when much of

industry owned by multi-nationals• Perception is key – is the UK a good place to do business

in – and are energy intensives welcome?• Regulations targeted at biggest emitters risk creating

distortions across a diverse sector – eg EU ETS small emitter opt out

• Regulations/incentives targeted at others have a significant impact on ceramics – eg decarbonising UK electricity generation,

• Low UK gas prices but high UK gas price volatility

So what is Government doing?

• Government committed to growing UK based industry• Renewable Heat Incentive – financial benefits for

industry• CHP treatment under Carbon Price Floor• “Package of Measures” for Energy Intensive Industry by

year end• Longer term treatment of Energy Intensive Industries

Renewable Heat Incentive

• 20 year payments (adjusted for inflation) to compensate for:– Capital and operating costs of renewable heating

compared to a gas fossil fuel alternative– Additional barrier and financial cost (assuming a 12%

rate of return for a reference installation, apart from solar thermal);

• Tariffs differ by technology and size• Ofgem E-Serve will administer the scheme• Expected to be open for online applications at end

November• Funded from general taxation not consumer levies as

previous Administration had proposed

RHI Tariffs

Levels of support

Tariff name Eligible technology Eligible sizes

Tariff rate (pence/

kWh)

Tariff duration (Years)

Support calculation

Small biomass

Solid biomass; Municipal Solid

Waste (incl. CHP)

Less than 200 kWthTier 1: 7.9

20

Metering

Tier 1 applies annually up to the Tier Break, Tier 2 above

the Tier Break. The Tier Break is: installed capacity x 1,314

peak load hours, i.e.:

kWth x 1,314

Tier 2: 2

Medium biomass

200 kWth and above; less than 1,000 kWth

Tier 1: 4.9

Tier 2: 2

Large biomass1,000 kWth and

above1 Metering

Small ground source

Ground-source heat pumps; Water-source

heat pumps; deep geothermal

Less than 100 kWth 4.5

20 MeteringLarge ground source

100 kWth and above 3.2

Solar thermal Solar thermal Less than 200 kWth 8.5 20 Metering

Biomethane

Biomethane injection and biogas

combustion, except from landfill gas

Biomethane all scales, biogas

combustion less than 200 kWth

6.8 20 Metering

Next Steps

During the rest of 2011• Continuing dialogue with BCC & Energy Intensive Users Group• Annual Energy Statement to Parliament including updated

costs impacts analysis• Publication setting out how Government will deliver the 4th

Carbon Budget (2022-27)• Govt response to CCA simplification consultation followed by

consultation on Scheme rules in new year; • EII Package focused on electricity intensive issues2012• CRC simplification consultation & draft legislation in Spring • Structured process on wider energy intensive issues• Consultation on final Transposition of EU ETS Directive

including decisions on small emitter opt out• CCA target negotiations

Questions?