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Industry should take leading role in securing the UK's energy future

Speaking to the SBGI microCHP seminar today, the Shadow Secretary of State for the Environment Richard Ottaway MP said that industry has the solid business and environmental credentials to take a leading role in securing Britain's energy future, by using supplies more efficiently and cutting our greenhouse gas emissions.

The full text of his speech is as follows:

"Back in March this year, shortly after I became Shadow Environment Secretary, I made a speech which looked at the implications of the Energy White Paper for the future energy supplies of the United Kingdom.

I argued that the current policies being pursued by the Government are leading us rapidly into a situation where we not only face a dangerous over-reliance on foreign gas supplies, but that our competitive advantage of cheap energy will be eroded.

We also run the real risk of not achieving our environmental goals for green house gas emissions and carbon reduction.

There are few more vital functions government can perform than the provision of a steady supply of energy. Our prosperity flows from our power. But most energy sources are finite - progress towards a sustainable energy future is essential.

Even in - especially in - a deregulated market, it is Government policy that predicts, provides, and moulds the shape of the electricity industry itself. Over time, we have seen a shift from coal, to what is at present, a secure mix of coal, gas and nuclear.

We have an adequate reserve generating capacity, and had a strong security of supply stemming from virtual self-sufficiency in gas. Continuing innovation from the industry has brought us some of the lowest prices in the EU.

However, we all know that this happy state of affairs is under considerable pressure. We are faced with a double challenge: our indigenous supplies are dwindling, and our traditional fossil fuel techniques are causing unacceptable damage to the environment.

These separate but interconnected problems are not unique to the UK. Across the world, nations are grappling with the same concerns.

The Energy White Paper published by the DTI last year attempted to set out a framework for capacity and consumption of power over the next 50 or so years, with particular reference for the period up to 2020. We in the Conservative party, along with many industry experts, have grave doubts that the Government's proposals will be an adequate solution to the challenges we face.

The paper had the strap line 'Creating a low carbon economy', and the dominating criteria of the policies were 'environmental'. It set a target, but in truth it is an 'aspiration' of cutting CO2 emissions by 60% by 2050 - a figure which is already discredited.

However, the question is whether the strategy will achieve those aims. The facts are well known. By 2020, it is estimated that Gas will have grown to around 70% of our provision, at the expense of coal, and that Nuclear will have declined to around 7%. The government's policy is that Renewables will have grown to fill the gap.

And for the first time ever we will not be self sufficient in our Energy supplies. It is a huge and fundamental shift in policy. By 2020 we expect to be importing around 90% of our gas - much of it from Norway but plenty of it from potentially unstable regimes, through vulnerable long-distance pipelines.

The issues of security of supply and foreign policy have been largely ignored. The white paper priorities, which are almost exclusively environmental, suggest, but without making a commitment, that this is an acceptable situation. Gas is cleaner than coal. Nuclear power has environmental concerns. Renewables are the technology of the future.

Broadly speaking, the Government have two strands to their energy policy. Build lots of wind farms, and import a lot of gas from abroad. In an attempt to reach their ambitious targets for renewable energy, the government have rigged the market in favour of wind farms.

Wind farms are, as we all know, deeply controversial. They are expensive. They are inefficient. They are unsightly. They are however the most mature renewable power technology available at present, so the Government have gone all out to ensure that they are built.

If that means that local people object because a natural beauty spot is going to be disfigured, then the planning guidance for local authorities must be changed. Something a future Conservative Government we will reverse.

If it means the MOD object to off-shore windfarms because of radar interference, then ignore them. Wind farms are the only game in town for this government, and it doesn't matter what people think.

There has to be a different way.

Slowly but surely, businesses and policy makers are waking up to the money-saving and environment-preserving possibilities offered by the genuine breakthroughs in energy efficiency that have been achieved in recent years. We in the Conservative Party are looking at the use of fiscal incentives to promote energy efficiency.

Government campaigns and the work of agencies such as the Carbon Trust are starting to gather pace. DEFRA have started to expand its licensing of 'energy-saving' products. These are useful steps, but it is now important to change up a gear or two, to start making a genuine impact on energy efficiency.

That is where CHP is so important. It is completely inexplicable why the Government has been so complacent towards an energy technology which offers an opportunity to mitigate many of the mistakes made by the Energy White Paper. Combined Heat and Power is one of the solutions to many of our future energy and emissions problems.

The Conservative Party's position is clear. We support CHP and believe that it should be given as much support as necessary to make it economically viable. Wherever you look at CHP schemes they bring environmental benefits to the community and provide for an efficient use of energy.

In schemes across the country from Edinburgh to Woking via Leicester the benefits are obvious and we support them. Projects in Woking and Beddington deserve particular mention for their contribution to sustainable energy. As we have a By Election in Leicester I quickly pay tribute to their Community based CHP scheme fired by local bio mass. There are many more.

In April the Government published its Combined Heat and Power Strategy, designed to help the industry meet a target of 10 GW of 'good quality' CHP by 2010. In her introduction to the paper, Margaret Beckett generously acknowledged that

"We recognise that in recent years the CHP industry has experienced serious economic difficulties and progress towards the target has been uncertain." That, it must be said, is putting it mildly.

Let us remind ourselves of the reasons for the "serious economic difficulties" suffered by the industry. On taking office the government wanted to cut electricity prices whatever the consequences. In response OFGEM produced NETA. Notwithstanding the carnage it caused in the generation sector, resulting in a slump in investment, the NETA arrangements of 2001 caused a major problem for CHP.

Prices for electricity fell by 10% in 2002, hitting smaller power producers hard. The system rewarded long term predictable supplies over smaller, less predictable sources. A direct consequence of this was that many CHP installations suffered. For example, British Sugar cancelled £100m of investment, and power exports from CHP generators fell 60% in a year. £3 billion of planned investment has been frozen.

The Government cannot escape the blame for this. It was warned by everyone from the "RSPB" to "Alcan" that NETA would be damaging to small players, yet it did nothing to mitigate the arrangements.

In fairness, once the consequences did become clear, the government recognised their mistake. In a House of Commons Westminster Hall debate on 17th October 2001, the Minister for Industry and Energy, Brian Wilson, said "I accept the problems of CHP are urgent….I have no interest in denying or concealing the fact that there are problems for CHP."

This was followed by masterful inaction and the sector remains sluggish. Subjecting CHP to the Climate Change Levy as if it was contributing to Climate Change was daft and sent the wrong signals to the CHP industry.

A few improvements have been slowly put into place. After considerable lobbying the obligation to pay the Climate Change Levy was eventually removed in April last year. There has been tinkering with the tax system to encourage micro-CHP, and investment in plant. These changes are welcome, but they will not produce the breakthrough the industry needs.

The Government have tinkered with NETA and come up with BETTA, which I understand the industry believes is anything but. There is little in BETTA which will significantly help CHP producers, or smaller renewable energy sources.

Most significantly of all, the Government have utterly refused to compromise on CHP's relationship with the Renewables Obligation This is a significant stumbling block, and the lack of flexibility on behalf of DEFRA and the DTI shows how little they appreciate the needs of the CHP industry.

The Government's argument that CHP is a mature technology not needing support is not necessarily correct. Furthermore, it sits rather uneasily with the Government's professed love for wind power, which is a considerably more mature industry than most other 'renewable' energy sources.

Turning to the Government's Strategy for Combined Heat and Power to 2010 which was finally published in April. The Strategy promised to "set out a framework to support the growth of CHP capacity in the UK and to enable the CHP industry to meet the challenges ahead."

In fact, in the words of the CHP Association, it was a "strategy without substance". The Paper acknowledges that the target of 10GW by 2010 of good quality CHP will not be met. In fact the last Conservative Government's target of 5GW hasn't been met. The most optimistic assessment suggests that around 9.4GW may be attained. And that is questioned by many. CHP capacity is now falling.

The Government claims that the effects of the EU Emissions Trading Scheme could add another 400MW to the forecast. Personally I need to be persuaded.

Thanks to NETA, during the baseline period for measuring carbon outputs, CHP plants were not operating at maximum efficiency. This then means that under the proposed Emissions Trading scheme, existing CHP plant will be disincentivised from operating at greater capacity - precisely the opposite of the Government's strategy to increase CHP use.

The Benchmarking for estimated emissions from proposed new CHP installations is crucial if increased capacity is to be an attractive investment, and it is distinctly possible that additional carbon allowances may have to be bought by those looking to install more plant - again, contrary to the Government's predictions.

While the Government assume that rising electricity prices will make the efficiency advantages of CHP more attractive, they forget the fact that Gas, which most CHP installations use, is also rising in price. So it would be negligent in the extreme of Government to assume that the increases in capacity are just going to happen.

The real, inescapable fact is that the Government have admitted that they will miss the target, yet have offered nothing new to assist the industry to reach its goal. As with so many other carbon-reduction power generation methods, there is no vision to see beyond what is a fairly unambitious target by international standards.

The Netherlands for example, which is of course a much smaller country, has a target of 15,000MW by 2010. The Danes generate half of their energy from CHP, and have a comprehensive package of tools and mechanisms for assisting the industry.

CHP has long been seen by the Conservatives as an important element in addressing the energy challenges facing the UK. My colleague in the shadow Environment team, Anne McIntosh, tabled an Early Day Motion in May that drew attention to the government's prevarication on setting out a strong plan for CHP growth.

We are not as convinced as the Government that the industry is out of the woods or poised for growth. I note that the Association commented last November that it had "long been sceptical of the Government's own confidence in its current policy mechanisms delivering for CHP"...this does not bode well for the robustness of the Government's commitment to a lower carbon economy."

But we in the Conservative party are convinced that the industry has the solid business and environmental credentials to take a leading role in securing Britain's energy future, by using supplies more efficiently, and cutting our greenhouse gas emissions.

This is an exciting time for the CHP Industry. We are poised for tremendous technological advances as the bigger plants become more efficient and use a wider variety of fuel.

Meanwhile the prospects for Micro-CHP continue to develop. Micro-CHP could offer the real breakthrough that the industry wants. Home generation physically involves people in climate change mitigation activity.

It is suggested that it may typically reduce the energy bill of a household by £150 p.a., achieve reductions in nitrogen oxide and sulphur dioxide emissions, and save around 1.5tonnes of CO2 per annum. If all the suitable UK homes for micro-CHP were converted, this would achieve a quarter of the UK's total Kyoto commitment by 2010.

If that isn't enough, the Cabinet Office Performance and Innovation Unit identified Micro CHP as the most efficient form method of carbon abatement. Furthermore the governments UK fuel Poverty strategy highlights that microCHP "has considerable potential to reduce fuel poverty."

This is why we supported the Micro generation clause in the Energy Bill currently transiting parliament. Bizarrely, the government's projected carbon savings from Micro CHP in the Energy Efficiency plan are set at Nil - despite VAT relief from next year - is anyone in government awake!

But we should not underestimate that to make real headway in people's homes is going to be a difficult task to deliver. The house-building sector is not always the fastest to innovate or experiment with new technologies, and that is partly a reflection of the conservative nature of house buyers themselves. The Industry will have to work hard to get its message across - and Government will have to work hard bringing all the parties together in order to drive take-up of Micro-CHP.

Regrettably they seem to be going in the wrong direction. I give three examples

· The original draft CHP strategy had a target of 400MW by 2010. It was dropped in the final publication.

· The Draft Energy Efficiency plan had a carbon saving target from CHP. It has been downgraded to Zero

· The 2004 budget announcement to reduce VAT on CHP has been changed to a vague promise to consider helping.

These reversals send the wrong signals to the industry and discourage investment.

May I make a couple of extra comments on policy perspectives? I said at the beginning of these remarks that the foreign policy aspects of security of supply had gone largely unaddressed. There are serious questions on over-dependency on imported energy which will be predominantly gas, the main fuel source for micro-CHP. To that extent I understand a hydrogen-powered fuel cell micro-CHP unit could be in production in the next decade. As it is my personal belief that the hydrogen revolution is coming, my hunch is that fuel-cell technology will have increasing government support in the future.

Secondly, I also mentioned that we were looking at fiscal incentives for energy efficiency - micro-CHP could play a part in this.

What is needed now is a step-change from the Government to ensure that the 10GW target is hit. This needs to be done through action, not assumptions of growth that have been proved wrong in the past. The challenges faced by the Renewables Obligation and the EU Emissions Trading Scheme are far too important to be ignored.

To use a timely metaphor in the middle of the Euro 2004 competition, this Government has taken its eye off the CHP ball for too long. It risks scoring a huge own-goal unless it starts listening to the industry now.

I believe strongly that CHP needs to succeed, not merely for its own sake, but in order to help redress the fundamental flaws in the Energy White Paper which I outlined at the beginning of this discussion. The industry is at the vanguard of the biggest revolution in energy provision since the industrial revolution. I wish you every success."

ENDS

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