EEF blog

A week of major energy policy announcements has culminated in the publication of the long-awaited Energy Bill today. Taken together, they lay the foundations for the more stable and affordable energy policy that the UK has been lacking for a number of years.

For investors, there is unprecedented long-term clarity over how much support will be available for low carbon electricity. The government has set out how much money will be on offer up to 2020.  There will always be calls for greater clarity, but this is much further than any other government has gone before.

On the divisive issue of a 2030 decarbonisation target, the government has plotted a constructive way through fierce political cross-fire. It will introduce a power into the Bill to set a flexible target through secondary legislation. Whilst the decision on whether or not to exercise the power will only be taken after the next election, this represents another step towards longer term energy policy.

For industrial consumers, the government aims to contain the impact of green policies on industrial competitiveness by capping the overall level of subsidies for low carbon generators. This is a decisive break from the open cheque book policy of the past decade

Keeping any decarbonisation target flexible will reduce the risk that the UK locks itself into an overly costly energy policy. We simply don’t know today the most-cost effective mix of technologies for tomorrow.

The commitment to exempt the most energy intensive industries from the price impact of decarbonising the UK’s electricity supply shows an ambition to provide a more level playing field for companies whose international competitiveness is being seriously undermined by the UK’s green policies

However, the detail matters and will determine whether a more investor-friendly and affordable policy is delivered in practice. So EEF will be holding the government to account on a number of key issues.

First, we will continue to press for a 2030 decarbonisation target to be established as soon as possible. This will help make the UK an even more attractive place to invest in clean technologies and will provide a clear objective for the major market intervention that the government has embarked on. 

Second, there needs to be a clear plan for restoring competition in the market. The government needs to set out and commit to a clear and ambitious timetable for moving to a more competitive approach to low carbon power where the market, rather than politicians, sets prices.

Third, the same long-term vision being brought to energy policy must be given to energy-intensive industries. The government must commit to extending the existing compensation package for climate change policies beyond 2015 and ensure that the exemption from the cost of decarbonising electricity announced today provides adequate protection for all industries that need it.

Finally, looking ahead to the gas strategy due out next week, the government has another opportunity to demonstrate that it is committed to a balanced energy policy.

Further switching from coal to gas can deliver substantial emission cuts. Whilst developing the nation’s shale gas resources could enhance our energy security and help contain energy prices rises. 

So the strategy must send a clear signal that gas still has a major role to play in our energy mix in the decades ahead.  

A report by the Committee on Climate Change (CCC) published yesterday sheds important new light on a major policy controversy that’s very rarely broached in public – is pursuing the 2020 renewable target the best way to cut carbon dioxide emissions?

Everyone agrees that we need to cut emissions and that in order to do so we are going to have to get a much higher proportion of our energy from renewable sources than we do today. No controversy there.  

So should the government intervene and decide what our future energy mix will look like? This is what the UK target to source 15% of energy consumption from renewable sources by 2020 effectively does. And make no mistake; it’s a very challenging target which means we will need to quintuple renewable energy production in a decade. This is, or at least should be, more controversial.

There is a wide range of options beyond renewable energy to cut emissions. These include nuclear power, capturing and storing emissions from fossil fuel-based power generation, a plethora of energy efficiency options and travelling more by train and other forms of public transport.

Yet for fear of being unfairly tarnished a climate sceptic or anti-renewables, few dare broach the question of whether we should be putting so many of our eggs in one basket. Perhaps it would be better to have ambitious emission targets (which we do), strong incentives to invest in low-carbon energy (which we do) and let the market select the best mix of technologies?

And this where the CCC report comes in, there is a very good reason why we should be questioning the wisdom of the 2020 renewables target – cost. A key finding of the report is that the majority of renewable energy technologies are likely to remain considerably more expensive than alternatives forms of low-carbon power generation for several decades.

For example, it predicts that in 2020 offshore wind, the technology many are pinning their hopes on delivering the lion’s share of the renewables target, will still be 60% more expensive than new nuclear power stations and, surprisingly, as much as 20% more expensive even than carbon capture and storage. The cost picture for earlier stage technologies like wave and tidal power is even less encouraging.

So should we be pushing so far and so fast with renewable energy? The potential consequences of avoiding the cost issue are significant. We run the risk of piling unnecessary costs on hard-pressed consumers and undermining our competitiveness for no environmental gain.  More dangerously still, we could weaken the widespread support for addressing climate change which currently exists.

The previous government committed the UK to the 2020 renewable energy target without any obvious consideration of the alternatives. The CCC’s report provides the Coalition with the perfect opportunity for a considered reappraisal of its merits.

As if the government didn't have enough on its plate with the economy, there is another area crying out for decisive leadership - energy policy. The UK faces an unprecedented combination of energy challenges over the next decade. 

Chief amongst them are replacing a significant proportion of our energy infrastructure, managing the risks associated with increasing reliance on imported natural gas and making dramatic cuts in carbon emissions.

To meet these challenges we will need hundreds billions of pounds worth of investment in a wide range of infrastructure and technologies, from upgrades to the grid and new gas storage facilities to renewable energy and nuclear power. And government has a crucial role to play - ensuring that the UK is an attractive place to invest and safeguarding the interests of energy consumers, who will ultimately pick up the sizeable bill. 

Unfortunately the energy policy inherited from the last government is no longer fit for purpose. It was forged in an era when the UK was self-sufficient in fossil fuels, had a lavish margin of spare power generation capacity and more benign economic times meant the cost of subsidising renewable energy was subjected to limited scrutiny. A new strategic direction is needed based on setting clearer responsibilities for long-term energy security and a more flexible approach to meeting environmental objectives in which the focus is on cutting emissions rather than setting arbitrary technology-specific targets.  

The government will need to move quickly. The regulator believes that the timescales required to secure finance, mobilise supply chains and deliver infrastructure mean that the energy industry will start making far-reaching and long-lasting investment decisions within the next couple of years. This leaves a very limited window of opportunity to implement new policies and institute market reforms in time to influence its decisions.

Energy is not an esoteric area of interest and importance only to technocrats in their ivory towers. Getting energy policy right matters.   It is integral to most aspects of modern life from transport and communications to the lighting, heating and cooling of our buildings.   It is also important to manufacturing and, by extension, the government's aspiration to rebalance the economy. For many manufacturers considering where to invest as the economy recovers, the security and competitiveness of energy supplies will be an important factor.  

The need for strong and decisive leadership on energy is why EEF published its "Energy Action" yesterday. In this document we set out the key actions we believe the government needs to take, and by when, to get energy policy back on track.  

It’s hardly groundbreaking. Research conducted by EEF has revealed that many of the UK’s manufacturers think climate change policy is a burden on their business. You’d be forgiven to think its manufacturers whinging about extra costs and being forced to do something they’d rather not.  

Yet a serious, methodical review of the current climate change policy landscape shows that they have a point.  The effectiveness of policy must really be judged against four tests. It must create clear, reliable and transparent incentives. It must ensure regulation targets the right places. Regulation must be simple and not administratively burdensome. And it must take clear account of the impact on the competitiveness of those businesses subjected to regulation. Climate change policy currently fails on all of these points.  

Manufacturers are subjected to a confusing mix of regulatory sticks and incentives which are failing to address the unique challenges they face. Manufacturers are directly subject to the Climate Change Levy. Some will be regulated by the EU Emissions Trading Scheme (EU ETS) and/or have a Climate Change Agreement (CCA). Many now fall under the Carbon Reduction Commitment Energy Efficiency Scheme (CRC).  

The sum of all this policy? Confusion and mixed, muddied incentives. Policy overlaps are frequent and reporting requirements are not harmonised, creating immense complexity and administrative burden. This complexity serves only to confuse the very signals to change behaviour that policies were brought in to stimulate. In addition, policy is generally extremely blunt. It fails to take into account the work already achieved, the technological boundaries of manufacturing processes and the host of other barriers manufacturers face when trying to improve the energy efficiency of their operations. Perhaps most worryingly government has yet to really grasp the cumulative impact of all this policy on the competitiveness and profitability of manufacturers.  

In short, our analysis shows that the current direction of travel risks undermining a healthy and vibrant manufacturing base. These are serious concerns at a time when there is a growing recognition that a vibrant manufacturing sector will need to be a linchpin in a healthy British economy. While we recognise that government has its hand tied in addressing European legislation, we are challenging government to rethink the UK measures used to regulate manufacturers in this area.  

To start with, we believe that the government should reform the current energy tax – the Climate Change Levy (CCL) into a carbon based tax. A variable tax which was set according to the carbon content of fuels would begin to provide the right price signals to energy suppliers and energy consumers. It would provide a stronger incentive to energy users to reduce high-carbon energy and fuel use, use high-carbon fuels more efficiently and to provide electricity generators with a stronger incentive to invest in lower-carbon forms of energy.  

As a first step users of energy currently subject to the CCL should be taxed according to the carbon content of the fuels they use. But the medium-term goal should be to extend the carbon tax throughout the entire economy so all of society shoulders the cost of tackling the threat of climate change – not just industry and business. Government must set in train preparations for this as soon as possible.  

Any reform of energy taxation must be accompanied by voluntary negotiated agreements which provide tax relief for industry, like the current Climate Change Agreements (CCA). While CCAs are supported by manufacturers and have proven to deliver significant reductions in carbon dioxide, we believe that these agreements are ripe for further reform. Government must recognise that each manufacturing sector operates differently and that individual, tailored solutions may be required. We want to see government adopt an approach which uses the carrot of tax relief to encourage improvements in energy efficiency – but in the context of what individual manufacturers are rationally able to achieve. We also believe government can go further to use these agreements to streamline other, existing regulation. 

Competitiveness concerns must be taken more seriously. While government appears to be taking greater consideration of the competition implication of its decisions, it must go further and at greater speed. In particular, government must routinely consider the cumulative impacts of its policy on manufacturers’ ability to compete and remain profitable.    And, finally, we’d like to see a shake-up of the Carbon Trust. Too few manufacturers report that the advice and support that this body provides is hitting the spot. The Carbon Trust must move away from its too-often simplistic 1-2-1 intervention approach and concentrate instead on the common barriers faced by individual manufacturing sectors. Only by getting to the heart of manufacturing processes can the substantial cuts in carbon dioxide that government is seeking be made.  These are the messages EEF will be taking to government. It’s time for government to take manufacturers’ concerns more seriously.  

It has now been two weeks since we found out that just 55 countries (many of these EU countries) have signed up to the Copenhagen Accord - the political deal that was struck in the dying moments of the UN climate talks in a snowy Copenhagen. The dust has settled but the impact of Copenhagen on British manufacturing is little clearer for it. 

Let’s recap on the Accord. Unfortunately it is a vague document. It establishes a commitment to attempt to restrict temperature increases to 2°C. It sets monitoring and reporting requirements for all countries. And it provides initial funding of $30 billion over a three year period to assist developing countries in mitigating and adapting to climate change, rising to $100 billion a year by 2020. But it is the last two pages of the document which hold the most interest. They contain two annexes. One records the emission reduction commitments of developed countries. The other lists the actions pledged by developing countries. 

The pledges fall far short of the cuts scientists say must occur in order to get anywhere near the 2°C goal. However, that 55 countries have submitted pledges is not to be sniffed at. Although many of these countries are based in the EU, the US, China, India and Brazil have for internationalised pledges for the first time. A year ago this would have been inconceivable. Together those making pledges account for around 80% of the world’s emissions. Sounds pretty impressive.  Certainly Joan Ruddock, Minister for Climate Change, thought so when we met her recently to discuss the fall out from Copenhagen. 

However it must not be forgotten that this document has no legal recognition. Until it is enshrined in domestic law, we have just the promises of politicians. I’m not a gambling woman but I would not like to hedge any bets on Obama’s ability to pass his plans on climate change through a Senate which is ultra sensitive to the current state of the economy. And China’s targets, while avoiding emissions that would have been generated on a business as usual scenario, will still allow growth to continue unabated. 

So what does this mean for us? Well, it means we are still exposed to the risk of carbon leakage for one - where market share, investment decisions or production is driven into other economies to avoid the costs and limits imposed by the regulation of greenhouse gases. And so we definitely don’t think now is the time to impose even stricter regulation without real thought about how to protect our vulnerable industries. 

Instead, we think government’s focus must be on helping industry cut energy costs and emissions through focussed and easily accessible funding for research, development and deployment. This could generate green technologies and help to secure jobs. And if government is serious about cutting substantial amounts of greenhouse gas, now is the time to step up diplomacy with countries like China, India, Brazil and the US. Rather than burdening UK manufacturers more, let’s try and get others to adopt comparable regulation and financial constraints.  

You can read more about what happened in Copenhagen here, along with our messages to government on what we think the next steps should . 

It was chaotic last night. Up until 11pm six different versions of the Copenhagen Accord were circulating, no one knew which followed which, if the deal was getting weaker or stronger. Then a press conference was announced by the European Commission, and then it was cancelled as it become apparent that the world would not necessarily support the document. Hours and hours of debate stretched into the night. But somehow, at around 10am today, a political deal was finally struck.

And here it is. For those of you who do not have an inclination to read it here are its main points of interest:

• Global temperature increases should be kept below 2 degrees C and deep but unspecified cuts in global emissions are required to achieve this. Emissions should peak "as soon as possible", though no time period is specified.
• Developed countries should file their emission reduction pledges for 2020 by the end of January 2010. How much is up to them.
• Developing countries should also take action to reduce emissions.
• The document discusses "various approaches, including opportunities to use markets" to promote cost-effective emission reductions. That keeps the door open for carbon trading, including taxes or cap and trade schemes for international aviation and shipping.
• There are promises of big new flows of money from rich to poor countries to help them adapt to climate change and reduce their emissions. There will, it says, be new and additional fast track funding "approaching" $30 bn over the period 2010-12. In the longer term, developed countries "commit to a goal of mobilizing jointly $100 bn a year by 2020 to address the [climate change related] needs of developing countries." But this funding depends on those developing countries taking "meaningful" actions to reduce their emissions, and "transparency on implementation" - i.e. showing that they are delivering these reductions.
• A new 'Technology Mechanism' will accelerate technology development and transfer from developed to developing nations, to help them adapt to climate change and reduce emissions. Very little is said about either the fund or the mechanism.
• There will be a review of the implementation of the accord in 2015. This will include considering strengthening the long-term goal of the accord and the convention: preventing a dangerous rise in global temperatures "including in relation to temperature rises of 1.5 degrees C."
• Tables at the end of the document list emission reduction pledges made by developed countries and those made by developing countries.

It will take time to really understand what this means for business. The Copenhagen Accord is accompanied by the outcome papers from the Kyoto Protocol work stream and the long-term cooperative work stream and tens of other documents which will need to be studied in order to really assess in detail what happened in those frantic last days of the talks.

Personally, on the basis of the content of the Accord, part of me is disappointed. Over the course of the two weeks those of us at the talks have seen clarity gradually slipping away as time has progressed. The final Accord provides little in the way of certainty and this will hamper the Government’s plans for a transition to a low-carbon economy. Manufacturers provide, and will provide, many of the low-carbon solutions that a low-carbon economy will need in order to flourish. A legally binding deal would have given industry the certainty to invest in low-carbon technology.

More worryingly, the Accord still leaves British industry still exposed to the risk of carbon leakage. The European Commissions is now due to review the EU Emissions Trading System in light of the outcome of Copenhagen. It is vital that the EU continues to recognise that the threat of carbon leakage has not diminished following Copenhagen. There simply is not enough evidence of comparable effort elsewhere in the world to impose even stricter targets upon industry.

But there is an additional angle. The expectations on Obama were great, but the truth is he had very little room for manoeuvre.  In 1997 when the Kyoto Agreement was first forged then US president Bill Clinton failed to get it ratified through the Senate. In fact it lost by a vote 95-0 against. It was never going to approve anything which limited US productivity while China could grow unabated. Today, Obama is fighting to get his Bill through the Senate. It needs 60 votes to get through and it has about 42 at present. Obama was sticking his neck out to pledge even a 17% cut. And now he now has a document to show the Senate which says, look China is committing to action too.

The document signals that the major actors are now engaged on this agenda. India and China while not curtailing their growth have agreed to take steps to moderate its associated emissions. The US for the first time has attempted in some way to internationalise a commitment to reduce its greenhouse gas emissions.  The UN is now aiming to transform the Copenhagen Accord into a legally-binding instrument at the next Conference of the Parties in Mexico in the latter half of next year. Whether you believe the science or not (or believe that the UN will be successful this its Mexico aim) the outcome from Copenhagen shows the agenda is far from dead.

While for 14 hours yesterday heads of state, presidents and prime ministers have been making grand speeches about the urgency of addressing climate change, their negotiators have been obfuscating.

Yesterday new groups were formed in an attempt to resolve some of the continuing crunch issues. They are the same crunch issues from the first day of the talks. The same crunch issues from the meetings leading up to Copenhagen. It was all starting to feel like Groundhog Day.

As these groups debated the thorny issues of finance, emission cuts, the role of developing countries and the like deep into the night, rumours were swirling around the snow-clad Bella Centre: Obama was not coming; the G20 had met in secret; a deal had already been negotiated amongst the big emitters. Perhaps the biggest (concrete) news of the night was the announcement by Hilary Clinton that the US would offer $100 billion a year in climate aid by 2020 providing that the developing countries make firm climate policy promises and for these to be transparent. China, who had previously vehemently opposed international scrutiny of their policy delivery, appeared to soften its position somewhat. The press said this signalled that a deal was close to being brokered.

But unsurprisingly when negotiators reconvened at 8pm they reported that while some progress had been made some intractable issues needed political guidance and others required more time. Some of these hold ups are technical issues. On the Kyoto Protocol, for example, these methodological issues include which base years to use, the length and number of commitment periods and whether to add new gases. The Chair suggested the use of a UN device, known as Friends of the Chair, where a small number of senior negotiators try to identify ways through the impasse. After some resistance by a number of developing countries, eventually it was agreed this should be the way forward. They were meant to reconvene at midnight. This was delayed until 3am. When they did meet they agreed that they had gone as far as they could go without political input.

It now rests in the hands of the worlds leaders. I’m not a betting woman but if I was I wouldn’t like to place any money on the outcome. Still so much is uncertain.  It will be difficult to track the talks over today – particularly as observer organisations have been pushed to the fringes of the talks*. Even ministerial press conferences (the life and blood of most ministers) have been cancelled this morning so more time can be devoted to the negotiations.

EU environment commissioner Stavros Dimas was reported saying that the EU was ready to go to a 30% emissions reduction target (it has current has committed to 20%) if the US is ready to do more than they have announced. Sources say that the Commission was last night asking EU member states how far they were prepared to go by 2020 – Germany offered 42% by all accounts. All eyes are on Obama today.

* NGOs are furious about this lack of access. Businesses too. I spoke to one chap from a European trade association who had queued for nine hours on Monday in the biting cold only to be told to return tomorrow. On returning, he was told he had no chance of getting in what so ever. He left deflated. Another Australian lady at the daily business meeting earlier this week was in tears as her CEO was flying in from down under and had no chance whatsoever of stepping foot inside the Bella Centre, let alone honour the appointments and speaking engagements he had committed to.

The so-called “high-level” segment of the climate talks began today. The next 48 hours represent a crucial stage of the talks.

You can feel this in the air at the Bella Centre; the atmosphere is charged, if a little weary. Numbers in the corridors have shrunk as observers are increasingly being denied access as government parties swell in advance of head of state attendance at the end of the week. Outside however numbers are growing, as more and more demonstrators and activists arrive with each passing hour (and some are removed, hundreds have reportedly been arrested). Some members of government parties have been left out in the cold and are struggling to get in amid the chaos.

Inside, ministers are now leading “informal” consultations on crunch issues: finance, developing countries role in cutting emissions and other issues such as trade issues and proposals for a levy on bunker fuels. I hear rumours that two parties of 25 ministers have been convened to tackle the issue of emission reduction targets.

COP president Connie Hedegaards strategy is to force political discussions in order to pave the way for a more comprehensible deal for heads of states to agree later this week. And they are a long way from that at the moment. What has emerged so far remains heavily bracketed – yet to be decided.

It is hard to get an overall sense of how things are developing as meetings retreat behind closed doors, but here’s how I see things standing on some of the key business issues:

Outcome from Copenhagen: Ms Hedegaard is aiming to broker one package by Friday with agreements on long-term cooperative action and the Kyoto Protocol, underpinned with a range of other agreements on issues such as capacity building and technology transfer. She also wants agreement on an overaching text which would demonstrate the political will to commit to emission reductions and finance. If agreement is reached on these elements they will likely be political in nature, with an aim to make it a legally binding agreement by 2010. But there are constant challenges to this plan and what will emerge remains subject to intense debate.

Numbers: Work to agree emission reductions targets have failed to be completed before today’s deadline, in part because of the numerous delays and suspensions in work in the last five days. These followed accusations that developed countries were dragging their heels in order to try and secure a new treaty whch contained commitments from China and India to control some of their spiralling emissions - not just developed countries. As a result, the current proposals are marked by gaps and blank spaces where there should be numbers.

Sectoral approaches: As I reported yesterday, attempts to agree some general text on sectoral approaches has failed after being blocked by developing countries. It is only being pursued for agriculture. As a result it is dropping off the agenda. I think this represents a real missed opportunity. If designed correctly, this could have offered a real way to tackle emissions from industry on an equal basis regardless of location.

Levies on aviation and marine bunker fuels: A proposal is to place a levy on bunker fuels – which the UN think would generate $12 billion a year on a steady and predictable basis - is being blocked by China, India, Saudi Arabia and the Bahamas. The blocking countries argue that the levy should only be applied in developed countries. 

Technology transfer: Technology and carbon-saving products and their global deployment is key to reducing emissions. Developing countries however argue that intellectual property rights are presenting a huge barrier. This has led to heated debate.s As it stands a decision to relax IPR is bracketed. But cooperative action on technology does look certain and there is a commitment to increase private and public energy-related R&D - doubling existing R&D by 2012 and increasing it to four times its current level by 2020. Watch this space for more detailed analysis of technology proposals.

Reform of the Clean Development Mechanism:  The EU has been advocating a shift to sectoral approaches in advanced developing countries to avoid the pitfalls of the project-based CDM (the mechanism which generates the credits to allow "carbon offsetting" in developed countries). Under the EU's plan a baseline for business-as-usual emissions in a particular sector would be set, and a county would start earning credits (which could then be sold to developed countries) once its emissions fall below the reference levels by an agreed amount.  The concern for us is the incentive used to stimulate action by the private sector in countries involved in such a scheme. We cannot allow a situation where companies in Europe effectively subsidise their competitors.

But as one of the leading negotiators said yesterday: "Nothing is agreed until everything is agreed." And very little has been agreed yet. The overriding request I hear from the manufacturing community in respect to climate change is that there is clarity in the direction of policy and that efforts are made to ensure that competitors face similar carbon constraints and costs, regardless of where in the world they are situated. At this stage we are as far from that as is possible. 
 

It was on, then it was off, now it is back on again. Talks have ressumed here in Copenhagen, but there is still a great deal of mistrust between the developed and developing world.

And a small comment made today in one of the negotiations could spell trouble for some of our most energy intensive industries. Attempts to develop a framework for developing "sectoral approaches" are failing. Negotiators have failed to agree upon even a general text on the matter.

European industry interest in sector approaches has been high in the run up to Copenhagen, particularly in those sectors at risk of carbon leakage - where the risks are high that production or investment will shift to unregulated regimes to avoid "carbon costs" or where EU-based industries lose market share to competitors based in countries where growth can continue unabated. For such sectors, concern about enhanced risks from carbon leakage in a post-Copenhagen world has been acute.

And figures from the OECD this September support these fears. It estimated that if the EU acted alone to reduce greenhouse gas emissions by 50 per cent by 2050, almost 12 per cent of their emissions reductions would be offset by emission increases in other countries. However if all industralised countries acted together, this would be reduced to below 2 per cent.

By targeting key sectors on a global basis competitive concerns could have started to be addressed in a rational way (and maybe satisfy a few US senators in the process, perhaps?). It would have also underpinned an effective agreement by helping to broaden participation in global emission reductions - there are after all extremely developed sectors in developing countries.

But as it stands the current proposal refers only to cooperative sectoral approaches and sector-specific actions in agriculture.

It reflects a real missed opportunity. Some sectoral mechanisms may be delivered through developing countries NAMAs (nationally appropriate mitigation actions) - but this could never deliver the scale of coverage needed to address competitiveness concerns.

The spectre of a future of greater protectionism is looming ever larger.