Government action to incentivise energy efficiency and deliver deregulation

Government action to incentiviseenergy efficiency and deliverderegulationNiall 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 Heat waves like 2003: • the norm by 2040 • mild by 2060 AddAdStott Nature 2004updated to 2007-HadGEM1 Source: Met Office Hadley Centre

Government action –framed byCarbon binding carbon budgetsLegally Budgets • 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% 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 650.0 600.0 550.0 MtCO2e 500.0 450.0 400.0 350.0 4

Significant cost effective energyefficiency opportunities exist in nondomestic buildings Simple measures: lighting and heating More complex: control, energy Improvements to management and buildings fabric (e.g. behavioural change Insulation) and 70% CO2 reduction 35% CO2 reduction by 2050 at no net energy generation by 2020 with net cost benefit £4,5bn But is the same true for Energy Source: Carbon Trust 2009 Intensive Industry?

Ceramics Performance in CCAs –achievement of targets but tradingrequired in one sub sectorIn 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? or Ceramics at the limits of energy efficiency? To be discussed in negotiation of CCA Target for 2013- 2020

Regulations to encourage energy efficiency & reduce carbon emissionsClimate Change Levy – increases price Main policies directly affecting nondomestic* consumption of fossil fuels &signal on energy use for business & public electricitysector – greater cost savings from energy CCL (LPG, gas, coal &efficiency electricity consumption**) &Climate Change Agreement – exemptions Fuel Duty (gas oil)from CCL for energy intensive industry inreturn for meeting energy efficiency targets EU ETS (consumption ofnegotiated with Govt fossil fuels) CCA (reducedEU Emissions Trading System– market CCL)based enables heavy industry to decide EU ETSwhether to abate or fund other’s cheaper (electricity CRC consumedabatement across the EU from grid***)CRC Energy Efficiency Scheme – * Industry, commercial and public sector, excluding offshore andincreases price signal on energy use, public refineriesexemptions apply, e.g. for CHP **Somerecognition of those improving energy ***EU ETS costs reflected in price of electricity consumed from the grid along with cost of RO and FiTsefficiency performance via league table

Coalition Government committedto regulatory simplification• 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

“Simplifying the CRC: Next Steps”30 June 2011Publication 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

Simplification Progress -Climate Change AgreementsConsultation 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

Some of the challenges facingUK 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 TariffsLevels of support Tariff rate Tariff Tariff name Eligible technology Eligible sizes (pence/ duration Support calculation kWh) (Years) Tier 1: 7.9 MeteringSmall biomass Less than 200 kWth Tier 1 applies annually up to Tier 2: 2 the Tier Break, Tier 2 above Solid biomass; the Tier Break. The Tier Break Tier 1: 4.9Medium Municipal Solid 200 kWth and above; 20 is: installed capacity x 1,314biomass Waste (incl. CHP) less than 1,000 kWth peak load hours, i.e.: Tier 2: 2 kWth x 1,314 1,000 kWth andLarge biomass 1 Metering aboveSmall ground Ground-source heat Less than 100 kWth 4.5source pumps; Water-source 20 MeteringLarge ground heat pumps; deep geothermal 100 kWth and above 3.2sourceSolar thermal Solar thermal Less than 200 kWth 8.5 20 Metering Biomethane injection Biomethane all and biogas scales, biogasBiomethane 6.8 20 Metering combustion, except combustion less than from landfill gas 200 kWth

Next StepsDuring 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

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Government action to incentivise energy efficiency and deliver deregulation

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