1. Natural gas will inevitably be the central fuel in theUKs energy and power mix between now and 2050. It is not yet clear what is a realistic level of power generationto expect from renewable sources. Thereare doubts about the economic viability even of simply replacing existingnuclear capacity with new nuclear plant and Ministers are on record as sayingcoal-fired generation only has a future if clean coal technologies can bedeveloped. Within the context of thepursuit of an energy policy based on a healthy mix of fuel sources, given theabundance of natural gas [1] more than 70% of the worlds gas reserves are within economic transportationof Europe the central challenge for UK energy policy lies in guaranteeingsecure gas supplies for the UK.
2. Natural gas can help the UK meet its environmental andenergy efficiency targets. Thelarge-scale switch from coal-fired generation to gas-fired plant that hasalready taken place should enable the UK to meet its Kyoto targets. With the right policy measures, DomesticCombined Heat and Power (DCHP) technologies can add substantially to the CO2emission reductions available in the UK, as well as delivering the highestlevels of energy efficiency. However,these environmental and energy efficiency benefits do require policy-makers torecognise that gas is the cleanest hydrocarbon and should not therefore betreated in the same way as other hydrocarbons when policies are framed.
Working from these two premises:
Weshould stress that, in this context, security of supply is not the same asenergy self-sufficiency. Nor should itbe used as another term for Government subsidy. The UK Government is committed to open and competitive energymarkets and, in our view, security of supply is deliverable by enabling thosemarkets to operate freely. Anotherprerequisite is a climate in the UK and the EU in which potential investors innetwork infrastructure are not deterred by an adverse regulatory climate.
BG Group believes that much of the PIU reportsanalysis of UK, European and international gas markets is insightful, accurateand realistic.
We agree with the PIU that, even inthe light of the UK becoming a net importer of gas by the end of thedecade, we do not at present see therisks associated with the gas-producing countries as a major threat to UKsecurity.
We also agree with their analysisthat the best way to secure gas supplies is to encourage diversity both in thesources of supply, and in the facilities and infrastructure on which theyrely.
Their conclusion that completingthe liberalisation of European gas markets will make an important contributionto security is also one that we share.
Similarly, we supportwholeheartedly the Prime Ministers view, contained in the foreword to the PIUreport: that increased reliance on energy imports from Europe and elsewhereunderlines the need to integrate our energy concerns into our foreign policyand that the UK cannot therefore only act through domestic policies, but mustaddress these issues via international policies and agreement, particularlythrough EU market liberalisation and the Kyoto agreements.
However,we are aware that, within government, there is a feeling that the PIU perhapsdid not address sufficiently closely the security of supply risks that lieahead. We believe that the challenge ofdelivering secure and sufficient supplies of energy can be met, providedcompetitive energy markets are allowed to operate freely and the climate forinfrastructure investment is right. Inour response we will seek to identify and propose means of removing the centralobstacles to the UK achieving its goal of securing sufficient energy particularly gas supplies.
The simplest way to promote security of gas and electricitysupply in the UK in the period to 2050 is by completing single EU energynetworks that are truly transparent and allow uninhibited trading and the freeflow of gas and power.
These networks must be sufficientlyextensive, flexible and robust to resist the impact of any securitythreat. In particular, theinfrastructure linking the UK to the Continental networks must be such that itforms an integral part of those networks and avoids any risk of the UK being avulnerable branch-line at risk of physical isolation.
With these provisos, the European gas market willbecome the biggest in the world and will act as a honeypot to many of thegas-producing countries in the Caspian, the Middle East and North Africa. Their supplies can encourage competitionwith and reduce to some extent dependence upon the three principal existinggas-producing countries exporting to Europe - Russia, Algeria and Norway. And the EU can offer an attractive deal:security of revenues for new gas-producing nations in exchange for European and therefore UK security of supply.
The European Commission has already identified theneed to strengthen both the gas and electricity networks and, to that end,published a useful Communication [2] in December 2001, identifying some of the problems, recommending somesolutions and urging regulators across the EU to bear in mind the need toincentivise infrastructure investment when they frame their regimes.
We would urge the UK Government,Ofgem and the European Commission to ensure that infrastructure investment cansecure rates of return sufficient to establish Continental gas and powernetworks, links between the UK and Continental Europe and a UK downstreamnetwork that are extensive, robust and flexible and meet UK security of supplyrequirements.
There are already encouraging signs that the market isprompting private sector initiatives that will go much of the way towardsguaranteeing sufficient import capacity and infrastructure for the UK whetherby pipeline or by LNG imports.
The Royal Academy of Engineering, inits submission to the DTI [3] consultation, estimates that the UK could need five new pipelines the size ofthe existing Bacton-Zeebrugge Interconnector between now and 2020. However, proposals for at least two majornew North Sea pipelines are already under discussion, increased compression atthe Zeebrugge end of the Interconnector should be installed in the next fewyears a development which will significantly increase import capacity anLNG import terminal is planned for the Isle of Grain and there will beincreasing ullage in the existing North Sea infrastructure in comingyears. With market signals also likelyto encourage further infrastructure investment to meet demand, suchdevelopments make forecasts of required pipeline capacity of this kind lessdaunting than they might at first appear.
In terms of securing imports, discussions are alreadywell underway with a view to securing substantial quantities of Norwegian gasfor the UK market. Plans to importQatar LNG into the UK are likely to be the first of a series of proposals tobring LNG into the UK.
These gas and infrastructure initiatives are likely torepresent only the start of a process, which over time should underpin UKsecurity of gas supply and provide sufficient infrastructure to guaranteeuninterrupted supplies.
However, any adverse changes toregulatory regimes could put at risk these positive developments and lead to aninsufficiently robust network.
As the UK moves towards becoming anet gas importer, HM Treasury should maximise the use of existing North Seainfrastructure, by treating pipelines used to import non-UK gas as outside thering-fence for all tariffs.
For security of supply purposes,the UK Government should also help ensure that, as far as possible, Norwegianimports in particular given the large share of UK imports likely to originatefrom Norway are landed via a range of pipelines, both existing and new, ratherthan delivered en bloc through large and potentially vulnerablenew-build pipelines.
We welcome Energy Minister Brian Wilsons ambition,outlined at the UK-Norway Cooperation Workgroup report launch on August 28 ofthis year, of ensuring the continued use of existing infrastructure, ascapacity in it becomes available [4] .
In terms of downstream infrastructure and other issues,we would refer the DTI back to our submissions to the PIU review. Our views on those issues remain unchanged.
Even though the UK will inevitably become a netimporter of oil and gas within the next 10 years, it makes sense to extract asmuch of the UKs oil and gas resources as are economically viable from theprovince.
For that reason, BG Group regretsthe decision to impose a 10% supplementary charge on North Sea revenues in the2002 Budget.
Although the introduction of 10% first year capitalallowances will help make some marginal projects more viable, it will notimprove the economics of larger projects and will hit heavily revenue streamsfrom existing fields. Companies thathave a large UK component to their portfolios will be particularly badly hit in BG Groups case by up to 400m cumulatively in the years 2002-2010.
BG Group has a strong record in exploration in theUKCS and it is vital to ensure that such companies remain active, continue thesearch for oil and gas in the province and maximise production.
We would urge the DTI and the Treasury to abolish the10% surcharge but, if not, to consider measures such as:
Extending the new R&D allowanceto UKCS offshore exploration with a view to maximising North Sea output anddelaying for as long as possible the date at which the UK becomes a netimporter of oil and gas;
Introducing differential tax ratesfor oil and gas and reducing for new or all gas-fields the 10%supplementary charge because of natural gass importance as a source ofelectricity generation and for both security of supply and environmental reasons;
An allowance for companies involvedin exploration and production in the UKCS, who lack outside ring-fence incomeagainst which they can claim some relief for costs.
The UK Government needs increasingly to be conscious ofthe high costs of operating in the UKCS, the relatively small average size offinds in the province at this stage in its development and the competing claimson private investment capital from other oil and gas provinces.
For that reason, a stable regime is the basic minimumrequirement, if North Sea output is to be maximised. Naturally, improvements, such as those outlined above, wouldincrease prospects of continued and new activity in the UKCS.
An increasingly frequently aired concern, in the lightof the UKs becoming a net importer of natural gas by the end of this decade,relates to storage and whether more physical capacity is needed to guardagainst unforeseen interruptions to supply.It is certainly the case that the UKs ability to access peak gasrequires back-up of a different nature once the country ceases to beself-sufficient in gas. The centralquestion relates to how that back-up is supplied.
The UK has 3.2 bcm of total working capacity, whichrepresents 3% of annual demand. Thisfigure compares with Belgiums 0.65 bcm, which amounts to 4% of annualdemand. At the other end of thespectrum, France has 10.8 bcm, or 32% of annual demand and Germany 18.37 bcm equivalent to 20% of annual demand [5] .
As the figures for Belgium demonstrate, it is possibleto have a functioning gas market based on gas imports albeit a relativelysmall one - without significant physical storage capacity.
But, in deciding whether to go for a Belgian orGerman-style model or something in-between, there are three central considerations:
The use of several import pipelineswill require significantly less physical storage capacity than will be requiredshould much of the UKs imported gas be delivered through one or two majorpipelines;
The key issue in relation toensuring security of supply is the UKs ability to access peak gas rather thanstorage per se. A flexible,robust and extensive gas network, multiple sources of gas supply, swingcontracts, LNG terminals, access to liquid trading hubs and dual-fired capacitycan all contribute to reducing the need for significantly enhanced orthodoxstorage capacity;
Supplier competitiveness and theavoidance of onerous new requirements, which will add to costs and prices,should be a central concern in the framing of any fresh proposals.
The need to invest in major new storage facilities,similar to Rough with costs possibly of the order of billions of pounds [6] - can be reduced by spreading the transportation of gas imports to the UKacross a range of pipelines. A simpleeconomic model can demonstrate that less extra storage capacity is required inthis situation than in the event of one or two major pipelines bearing most ofour import needs. Not only is themulti-pipeline option more secure in terms of delivery; it is cheaper too,given that there is a need for less investment in storage capacity.
We at BG Group will look further into this area andwould urge the DTI to carry out some research as well to demonstrate the point.
In terms of access to peak gas, alternatives to orthodoxstorage capacity - such as multiple sources of supply, swing contracts, LNGimports and access to liquid trading hubs, are likely to prove morecost-effective.
The European Commission is showing increasing interestin trading hubs as an important facet of a liberalised European gasmarket. They are right to do so. There is no doubt that liquid trading-hubscan play a major part in responding to market signals and easing the flow ofgas to areas of high demand.
LNG at storage terminals, such as that being proposedat the Isle of Grain, can provide additional comfort as well. However, although liquefied gas kept in coldservice can be available as a domestic or industrial gas supply or as powerwithin a matter of hours, this is useful as a response to short-termproblems. It is not the solution tosustained supply interruptions.
Depleted North Sea gas-fields do offer a majorpotential storage resource in future years but the UK Government should notunderestimate the technical, infrastructure and cost implications of such anapproach.
The UK Government should also look to Spanishexperience before applying rigid requirements on suppliers. The Spanish Government requires suppliers tomaintain 35 days of supply of strategic gas stocks [7] ,a stipulation that is already prompting some potential new suppliers to theSpanish market to reconsider their position.
As outlined above, a key plank in delivering securityof gas supply to the UK lies in establishing a truly liberalised pan-EU market.
The UK Government should:
Seek to ensure the achievements ofthe Barcelona summit are translated into a proper, transparent, functioningsingle European gas market;
Support the Madrid Forums effortsto draw up the detailed provisions that will guarantee that that market isactually rather than theoretically open;
If necessary, urge the EuropeanCommissions Competition Directorate to intervene in the face of any refusal bymember states to implement the gas directives.
The continuing closed nature of French gas and powermarkets is a matter of record. Nor canit be acceptable that, for example, Germany can claim a gas market that is 100%open while its regime operates in a manner that frustrates many majornon-German suppliers, prompting them to exit after expending considerableeffort in trying to gain access.
It is worth noting that, despite Germanys position asa European gas hub and its significance as a landing point for Russian gas attributes which could provide fertile ground for competition - its gas-pricesare amongst the highest in Europe for industrial and domestic consumers of allsizes.
The controversial takeover of Ruhrgas by E.ON promptedsome industry analysts to claim that it is crucial for Germany to have apowerful buyer as a counterpart to Gazprom the monopoly Russian seller toGermany. Others claim that, in a matterof years, around five so-called national champions will have cornered the gasand power markets right across the EU.
There is no inevitability aboutthis. There must be room in theEuropean gas and power markets for a range of players of different sizes andthe UK should support the European Commission in its efforts to ensureliberalisation is not thwarted by incumbents abusing their position to squeezeout competition or by excessive market concentration.
Recent BG Group experience in the course of projectevaluation in Continental Europe has revealed a range of companies of differentsizes showing an interest in involvement in new opportunities some of thempotential first-time entrants into a given market. We foresee a European gas market accommodating a variety ofcompanies of different sizes.
The modus operandi of the European gas networkshould eventually be such that a purchaser from any EU member state can strikea contract with a supplier feeding gas into the network at any point and thendraw off that contracted gas at the point at which they wish to deliverit. Market signals will determinewhether such deals are economic.
Signs that the market is already beginning to respondin this way to price-signals are already visible. For example, UK gas during the summer of 2002 was being sold intothe Italian market. Although aninternal EU transaction, this is proof that long transit distances andcross-border bureaucracy need not interrupt the workings of a liberalisedmarket.
BG Group supports much of the detail of the draftsecond gas directive [8] and believes that, if it were to be implemented in this form, it would be animportant step forward in the liberalisation process.
Our view is that, in markets that are alreadycompetitive, it is important only to use regulation where there is genuinemarket failure or natural monopolies.
Governments and regulators shouldnot try to second-guess competitive markets and should resist the temptation tointervene. Where they do, they shouldconduct cost-benefit and regulation impact analyses prior to the enactment ofany new measures.
This should ensure that any measures implemented do nothave unexpected or disproportionately adverse impacts.
However, particularly but notexclusively - in markets where competition is not established, there is a need,as identified in the draft second gas directive, for independent regulators,regulated third-party access and legal unbundling of transmission systemoperatorship from production and supply activities.
On the detail of the directive, there is a risk thatthe original proposals for the regulation of LNG terminals would have adetrimental effect on the Commissions laudable attempts in its recentinfrastructure communication [9] to encourage the construction of new LNG facilities across the EU.
Where regulation is deemed to be necessary, it isimportant that there is sufficient flexibility to prevent new entrants frombeing burdened unnecessarily by regulation, which is aimed at incumbents. New entrants can often be good forcompetition.
BG Group supports the DTIs effortsto include drafting that allows new LNG terminals to be exempted from regulatedThird Party Access with a view to encouraging infrastructure investment butonly where such an exemption would not be detrimental to competition.
We believe that the Prime Ministeris now firmly of the view that energy policy must be at the heart of UK and EUforeign policy. We wholeheartedlysupport that view.
UK and European foreign policyshould have as a central driver support for private companies seeking to securediverse sources of gas supply and their transit into the European gas networkfrom North Africa and the Middle East to the Caspian to complement andcounterbalance the major existing suppliers in Russia, Algeria and Norway.
The Prime Minister, through hisspecial relationships with President Putin and President Bush and via EUdiplomacy, should seek to meet three aims:
o Ratification of the Energy Charter Treaty and of a gas transit protocolby Russia;
o Construction of alternative non-Russian pipeline routes into theEuropean oil pipeline network; and
o Securing a climate safe for private sector investment in gasinfrastructure and production in Russia.
The UK Government, via the EU, should support WTO effortsto promote further global liberalisation of energy trade as part of the Doharound.
The issues relating to Caspian oil and gas aredifferent. The process of ensuringCaspian oil is integrated into world oil and gas trade by establishingcommercially viable alternative pipeline routes to the Russian networks suchas Baku-Tblisi-Ceyhan and Caspian Pipeline Consortium oil pipelines is beingaddressed, though continued pressure from the UK and the EU is required. In the review of energy policy commissionedlast year by the US Government [10] ,the Baku-Tblisi-Ceyhan pipeline was identified as a key strategic aim.
As far as gas is concerned, Russian ratification of theECT and a transit protocol would be a major step towards enabling oil and gassupplies from Caspian countries to be sold directly into European marketsrather than at present being virtually entirely subsumed into Russian pipelinenetworks and sold on at their terms.
These would be positive developments not only forEuropean diversity of supply; they would also increase the benefits availableto the Caspian producer countries from their hydrocarbon resources.
The current impasse over the development ofsome of Russias massive remote gas fields needs little further commentary butit is clear that major Western private investment is needed to help gain accessto these reserves but that the legal and contractual safeguards required do notat present exist.
While the UK, EU and, to a degree, the US should allstrive for major reform of the Russian system, there appear at times to be risksthat EU foreign policy in particular at times risks focusing so closely on theEU-Russia relationship that other potential strategic alliances can beoverlooked.
For example, we are aware that, in large part due tolimited staff resources, there is little opportunity to nurture EU-Caspianrelations. However, good progress hasbeen made in EU-Iran relations and we welcome the EUs attempts to encouragereform in Iran and to foster an energy dialogue. Over time, this could produce a major new source of gas supply -just one of a series of potential new suppliers.
BG Group welcomes the European Commissions increasingacceptance that there is a role for long-term contracts even after the creationof a single European gas market.
Governments and regulators shouldavoid being overly prescriptive on matters such as the form of contractsbetween players. Long-term contractsmay be important to underpin financing of major infrastructure projects.
This is particularly true in the case of some of themajor Russian gas-fields in need of investment for development. As Jonathan Stern points out in a recentpublication [11] , evencompletely liberalised markets do not preclude a large element of long-termcontracts for example, around 70% of gas supplies in the UK are stillsupplied through long-term contracts.However, he points to an organic process, which appears to be shorteningcontract-length from 15-25 years to 8-15, reduced take-or-pay obligations, downfrom 80-90% of annual contract quantity to around 50-60%, and more floatingindexation of gas-prices.
A cause of some considerable concern in Government andamong some contributors to the DTI consultation relates to the threat tosecurity of energy and in particular gas supply from producer statesshutting off agreed gas flows for political reasons.
This analysis overlooks the recordof major gas-supplying countries outside the EU in the past and underestimatesthe importance, particularly to developing nations, of guaranteed revenuestreams.
These revenue streams can and in many cases will formthe principal means of countries achieving economic stability. That economic stability can over time breedpolitical stability. As we have saidabove: security of revenues for these nations is a trade off for underpinningour security of supply, weakening dependence on the big three of Russia,Algeria and Norway. It is also the casethat the more diverse sources of supply feed into the European market, the lessvulnerable to political action we are however realistic or otherwise thatthreat might be.
The points are well put by Jonathan Stern in hisrecent RIIA essay [12] :In the post-Soviet era, it is rather moredifficult to devise a scenario in which Russia would choose to threatenEuropean countries individually, or collectively, commercially or politically by threatening to cut off gas supplies.While Russian gas deliveries to Europe will increase substantially up to2010 in absolute terms, and perhaps also as a percentage of European gasdemand, Gazproms monopoly over gas exports to Europe will undoubtedly bebroken at some stage during the decade.While Gazprom will remain an extremely powerful export presence, it isentirely possible that as many as six other companies will have significantquantities of Russian gas to export to Europe in competition both with oneanother and with other suppliers.
Not only would it be welcome if Sterns forecast of anend to Gazproms monopoly were to prove to be correct but competition couldalso be further enhanced if as we propose above Caspian gas supplies canfind their own way into European markets.
Algeria, despite extensive internal civil strife, has neverthreatened political disruption to supplies and, as Stern says: Gas exporters have a dependence on revenues from theirexports which may be just as great as the dependence of importers and, as hasbeen convincingly demonstrated in respect of oil exporters, this need forrevenue is likely to be a source of competition for market share in thefuture. In 2000, natural gas exportsprovided 16% ($16.6bn) of Russian, and 33% ($7.1bn) of Algerian, convertiblecurrency revenues. Given the fragilityof these countries economies, to risk losing such revenues as a result ofpolitical or commercial threats would be a high-stakes act. Moreover, given the rigidities of gasexports compared with oil the pipelines and the markets are where they are,and export volumes cannot be reoriented to other destinations any threat touse gas as a commercial or political weapon risks depriving exporters of anylong-term export future. [13]
Since September 11, 2001, there has been considerablefocus on the likelihood of terrorist attacks on major gas facilities, though itis hard to see why gas facilities should be any more at risk than, say, nuclearplant or power stations using other fuel types.
In fact, there have only been two security incidentsin Europe in the last two decades: a strike among Norwegian offshore workerscut UK supplies by one quarter for several days back in 1986, though little wasmade of the event at the time; and, in November 1997, a terrorist bomb explodedin Algeria on a section of the Trans-Mediterranean pipeline to Italy. Other supplies were found and no significantinconvenience was caused. Last yearIndonesian LNG exports to Japan and Korea were curtailed by politicalinstability causing the shutdown of the Arun plant for several months [14] .
Transit dependence has been more of an issue, thoughunauthorised diversions of Russian gas by Ukrainian companies have tended tocause difficulties lasting only a few days.Over time, they have encouraged Gazprom to devise a new export routestrategy, reducing volumes passing through Ukraine.
The messages from this record arethat the European gas network needs to be sufficiently extensive, robust andflexible to accommodate any disruption.Naturally, in the post-September 11 world, we need to be mindful of anypotential threat to the gas network without overstating the risks, orsuggesting that the gas network is more vulnerable than any other fuel deliverymechanism.
Dove-tailing energy and environmental policies
BG Group made clear in its submission to the PIU that:
We accept that climate change is areality, support the placing of greater emphasis on it in energy andenvironmental policies and believe that the objective of energy and environmentpolicy must be to drive lower carbon intensity into the economy
The case for natural gas is anenvironmental case. Natural gas has thelowest carbon content of all hydrocarbons.Oil contributes 22% more CO2 equivalent emissions and coal 40% more.
Using natural gas in place of other fossil fuels is,therefore, an effective way of reducing UK, European and indeed globalbluehouse gas emissions.
The process of driving lower carbonintensity into the economy will have two components: greater use of lowercarbon fuels and a more efficient use of energy. The intent of policies should be clear to avoid perverseoutcomes.
This means it is essential todifferentiate between oil, coal and gas in all energy policies.
Although adjustments are being made to the climate changelevy for example via exemptions for CHP it makes more sense to framepolicies that incentivise the use of cleaner fuels alongside energy efficiencymeasures than it does simply to penalise all energy consumption.
Energy efficiency should be pursued as a priority within acarbon saving programme. We support theInter-departmental Analysis Group (IAG) [15] ,which concluded thatthe key issue is not whether energy efficiency should be pursued asa priority within a carbon saving programme but how.
BG Group accepts that, as climatechange targets become more demanding, policies and measures will inevitablybite more deeply. Carbon trading is themost efficient means of delivering emissions reductions from business. Carbon taxes are a second best solutionwhere trading is not appropriate.
BG Group believes that DCHPtechnology is amongst the most effective ways of achieving further major carbonabatement and energy efficiency savings in the UK
BG Group is developing the MicroGen DCHP unit and intendsto launch the product commercially in the UK in just over one years time. We expect to be first to market in the UKwith a Micro-CHP product.
The unit, which fits into the same space on the wallas a traditional boiler, gas-fires central heating but also turns much of theenergy normally lost in the heating process into an electricity supply for thehome.
Micro-CHP can contribute to economic, environmental and social objectivesby:
o Reducing the typical households energybills by around 150 per year, thus helping lift people out of fuel poverty;and
o Reducing CO2 by around 1.5tonnes per household per annum.
Micro-CHP can also improve security and stability of supply by reducingenergy usage, increasing the diversity of its supply and reducing peak loads onthe network because it generates power independently of large, centralisedpower stations.
The PIU, in its Energy Review [16] ,identified Micro-CHP as by far the mostcost effective of all the carbon abatement methods. In fact, the costs of cutting CO2 emissions via DCHP arenegative.
BG believes that Governmentsupport for carbon abatement measures should be targeted at the mostcost-effective solutions.
Householders can also feel they are making a realcontribution towards combating global warming.A DCHP unit will cut CO2 emissions by 38% compared to an average boiler.
Given that that translates into 1.5 fewer tonnes of CO2emissions from the average home per year, that means:
If every one of the 13m homes inthe UK capable of converting to DCHP did so, that would mean cutting nearly 20mtonnes of CO2 emissions. That compareswith the UKs total Kyoto CO2 target reduction of 88m tonnes. Even at more modest levels of penetration,it is clear that the technology can deliver major environmental benefits andhelp the Government meet its blue targets.
In terms of energy efficiency, the gains are strikingtoo. In traditional power generation,for every 100 units of primary energy input at a power station, only 40 ofthose units make it to the home due to losses in converting the energy intoelectricity and transmitting it. ForDCHP, with no transmission loss and high levels of energy efficiency, thecomparative figure is more than 90 out of the initial 100 units.
What should Government do to achieve theenvironmental and energy efficiency benefits of DCHP?
The CHP Strategy outlines awide range of fiscal incentives and support for the non-domestic sectors - but significantlyless in the domestic sector. As weoutline above, with appropriate support the domestic sector and micro-CHP inparticular can play a key role in achieving environment targets.
Specific measures, which would correct market failures thatthreaten to obstruct the benefits of Micro-CHP and would enable the technologyto make a significant contribution towards a low carbon economy, are currentlyavailable to other carbon abatement fuels and technologies and merely need tobe extended to Micro-CHP. These are notDCHP-specific measures.
Marketfailures, which BG Groups own market research has identified, include the factthat customers naturally tend to be driven by cost rather than byenvironmental concerns.
In economicterms, customers also tend to be driven primarily by up-front costconsiderations. Micro-CHP, as a productthat offers lower running costs for a slightly higher capital outlay, isdisadvantaged by this approach. It isalso the case that, at present, many household energy efficiency measures arenot reflected in the value of the property when homeowners come to sell.
Ourresearch has also revealed that customers tend to have imperfect informationabout the options when replacing their boilers and are often heavily influencedby installers.
Unlike other energy saving measures, such as loftinsulation - which can always be delayed- the high proportion (80%) of central heating replacements which aredistressed purchases means that the window of opportunity for boiler replacementsis small - around once every 15 years.The impact of that decision on the environment is huge. Customers needto be well informed when they make that decision and that they consider all thebenefits and costs, including those to the environment, when making it.
If they arenot, the UK risks missing a major opportunity for the UK to take a big stepforward in terms of CO2 emission cuts and energy efficiency gains.
We would urgethe UK Government to support a major public information programme aimed aturging homeowners to take longer-term and environmental considerations intoaccount when they replace their boilers.
The Boost Programme, aimed at encouraging use of LPG in vehicles, is an example of justsuch an initiative, although we believe that given the benefits available interms of CO2 emission cuts and energy efficiency gains a public informationprogramme for Micro-CHP would need to be on a much larger scale.
Specific measures, whichwould correct the market failures identified include:
o Direct grant support similar to that provided to the solarelectricity industry and LPG vehicles.
o The extension of 5% VAT to all accredited Micro-CHPinstallations. The reduction to 5% VATfor Micro-CHP installed under the Warm Front scheme recognises the importantcontribution of micro-CHP this shouldbe extended to all accredited Micro-CHP installations
o Accessto enhanced capital allowances for accredited Micro-CHP. Enhanced capital allowances are currentlyavailable to boilers installed under the Affordable Warmth Scheme they shouldalso be available to accredited Micro-CHP.
o Inclusion of Micro-CHP in existing accreditation andsupport schemes (e.g. EEC, SAP, and CHPQA)
o The removal of the 10% of a suppliers targetrestriction, from the additional incentives offered within the EnergyEfficiency Commitment Scheme (EEC) for energy efficiency measures delivered viaan Energy Services Scheme.
BG Group also believes thatthe 28-day rule [17] ,as it currently stands, denies the customer the benefit which they couldachieve from signing up for a package, which includes an energy-saving devicesuch as Micro-CHP and an energy supply contract.
This type of packagecould be used to reduce the upfront cost to the customer, which has beenidentified as a barrier to the installation of energy efficient devices thatoffer lower running costs and environmental benefits for a higher capitaloutlay.
The market failures identified, together with marketanalysis such as the MicroMap study [18] ,clearly demonstrate that further policy measures are required if the potentialof Micro-CHP to fulfill Governments environmental, social and economicobjectives is to be achieved. We wouldalso urge Ministers, officials and Ofgem to press on with resolving the outstandinglegal, regulatory and technical obstacles that currently stand in the way ofthe commercial launch of Micro-CHP
Environment and Energy Ministers have made clear their zeal for muchgreater energy efficiency and improved air quality. Many of their policies are designed to help renewable energysources achieve that. With similarbacking, DCHP can deliver the same benefits and most likely on a much shortertime-scale.
However,over time, the technical, regulatory and legislative framework that enablesgas-fired DCHP to deliver energy efficiency gains and carbon abatement canapply equally to renewable technologies such as photo-voltaics and fuelcells. So, by acting as the launch fuelfor DCHP, natural gas can act as a bridge to renewable energy sources.
[1] Based on publicly available figures for international reserves, BGGroup is of the view that there is sufficient natural gas to meet global demandfor over a century. Others, such asDavid Voss of the Massachusetts Institute of Technology, put the figure atcloser to 200 years.
[2] Communication from the Commission to the European Parliament andthe Council, European energy infrastructure COM(2001) 775 final,2001/0311(COD), 20 December 2001.
[3] An Engineering Appraisal of the Policy and Innovation UnitsEnergy Review, Memorandum prepared by The Royal Academy of Engineering, August2002, pp19-20.
[4] Also see pp 7 and 8 of this document.
[5] All figures from Appendix C of Security of European Natural GasSupplies, The impact of import dependence and liberalization, by JonathanStern, July 2002, Royal Institute of International Affairs SustainableDevelopment Programme.
[6] Underground Gas Storage in Europe and Central Asia a study ofthe United Nations Economic Commission for Europe, R.Sedlacek. Oil Gas European Magazine, 4, 1999.
[7] Gas Security of Supply in a Growing Market, Jordi Dolader, IEARegulatory Forum, February 2002
[8] Amendedproposal for a Directive of the European Parliament and of the Council amendingDirective 98/30/EC concerning common rules for the internal market in naturalgas. 10068/02 ENER 136
CODEC 777, 21 June 2002
[9] See footnote 2 above
[10] Reliable, Affordable and Environmentally Sound Energy for AmericasFuture, Report of the National Energy Policy Group, May 16, 2001. http://www.energy.gov/HQPress/releases01/maypr/forward.pdf
[11] As footnote 3, page 9
[12] See footnote 3, page 18-19
[13] As footnote 7
[14] Examples as footnote 7, page 16
[15] Long Term Reductions in bluehouse Gas Emissions in theUK,Report of an Inter-departmental Analysts Group, Feb 2002. http://www.cst.gov.uk/energy/bluehousegas/bluehouse.pdf
[16] Table 6.1, p108, The Energy Review, A Performance and InnovationUnit Report, Cabinet Office, February 2002,
[17] The 28-day rule enables consumers to be bound contractually to agiven power supplier for a maximum period of one month.
[18] The potential market formicro CHP in the UK, report presented to the Energy Savings Trust by Energyfor Sustainable Development Ltd, 14 June 2002. http://www.est.org.uk/est/micromap.pdf