Royal Commission on Environmental Pollution

The messages of the Commission's report, Energy - The Changing Climate (published in June), were that the threat posed by climate change has immense long-term implications for the way energy is obtained and used, that among other things this is likely to entail fundamental changes in the gas and electricity industries, and that action to bring about such changes needs to start soon.

The Commission accepted the position adopted in the Utilities Act, that the economic regulator should act in accordance with guidance given by the government on social and environmental matters, or where more appropriate in accordance with specific statutory provisions on social and environmental matters.

Two points about the environmental action plan follow from that. First, it is not the economic regulator's function to have a separate view on environmental (or social) issues, and the environmental action plan should not purport to do that. The appendix to the discussion paper dealing with climate change is seriously defective; but, as this is an example of the kind of material that is outside the legitimate scope of the environmental action plan, comments on its content are not offered here. The second point is about timing; the environmental action plan cannot be finalised until the government's guidance on environmental and social matters has been formally given.

Although the economic regulator's function on environmental and social matters is to work within a framework laid down by government, the regulatory authority nevertheless has crucial roles in advising on the practicability and implications of proposed objectives and targets, in facilitating the achievement of objectives and targets set by government, and in ensuring they are achieved in the most efficient way. The regulator should encourage innovation and creativity, and use competition as a spur to improved performance by the industry, but in pursuit of environmental and social objectives set by government.

The Commission has several general concerns about the discussion paper. It does not appear to give sufficient emphasis to the specific provisions of the climate change programme which the government has published in draft. Nor does it give sufficient emphasis to improving efficiency of energy use by end users, and the role of the economic regulator in bringing that about. The larger part of the reductions in carbon dioxide emissions provided for in the draft climate change programme arise from increased efficiency in end use.

The paper also suggests (paragraph 7.2) that the three elements of sustainable development (economic, environmental and social) need to be considered separately. The essence of the concept of 'sustainable development' however is that they should be considered alongside each other. While there may be many circumstances in which two or more of the elements come into conflict to a greater or lesser extent, the aim is to maximise the occasions on which they can be satisfied simultaneously. That ought to be the main emphasis in this environmental action plan. For example, improved heat management in housing may simultaneously achieve both social and environmental objectives. And improvements in energy efficiency that are self-financing even at present-day energy prices simultaneously achieve economic and environmental objectives.

Taxation of energy use is a function of government, not the economic regulator. However, the environmental action plan should recognise explicitly that the economically efficient price for energy will be one that reflects the external costs of obtaining and using it. The Commission's recommendation was that this should be achieved through an upstream carbon tax, which should in due course replace the government's planned climate change levy. So long as it remains government policy not to impose taxes that would increase the cost of gas or electricity for domestic energy users, the Energy Efficiency Standards of Performance Scheme provides an essential alternative mechanism for increasing the efficiency of their end use, likewise justified by the external costs such use imposes.

Comments on the 'Summary of actions'
Section 7 of the discussion paper is in such tentative language that it does not at present live up to the title 'Summary of actions'. The Commission considers that, taken as a whole, it needs to be strengthened considerably, and has the following comments on individual paragraphs:

7.2, 1^st point: while a checklist of environmental implications may be an essential tool for the regulator's office it will not be effective unless there are corresponding changes in corporate culture

7.2, 2^nd point: something much more positive than ongoing consideration is needed. In the case of electricity, the reduction of transmission and distribution losses needs to be considered as an integral part of the wider issues raised by embedded generation. Actions to reduce losses of methane, which is an especially powerful greenhouse gas, are equally important

7.2, 3^rd point: it is doubtful whether general guidelines about sustainable development, not anchored to particular policy issues, would serve a useful purpose. In any event, as expressed here, this proposal seems misconceived, for reasons given above

7.3, 1^st point: the aim should be to devise regulatory structures that will encourage generation of electricity from renewables, CHP and other embedded sources, not simply to identify and eliminate potential barriers to that

7.3, 2^nd point: policy towards embedded generation is of central importance, but this specific recommendation will be overtaken by completion of the Embedded Generation Working Group's task

7.3, 3^rd point: this proposal is far too tentative. The economic regulator should not merely monitor the operation of the wholesale electricity market, but investigate whether changes are needed in the rules under which the market operates in order to achieve government objectives, and if so ensure the necessary changes are made

7.3, 4^th point: after introduction of the renewables obligation the offer of green tariffs will be justifiable only if they are underpinned by renewable generating capacity over and above that which counts towards fulfilment of the renewables obligation. It will be an essential function of the economic regulator to certify that green tariffs offered at that stage achieve additionality and do not represent double-counting

7.4: the Commission supports all the actions listed in this paragraph on energy efficiency. It believes they should be strengthened by placing a much higher priority on levelling up the performance of all supply companies in promoting energy efficiency to the level already achieved by the best and on directly encouraging (rather than merely facilitating and monitoring) the development of energy services options, which will extend the range of choice available to customers, and thereby extend competition

7.5: the Commission supports transparency of billing, provided it extends to the benefits achieved through environmental policies as well as their costs. That would entail printing on customers' bills, alongside information about extra charges, the reductions being achieved in carbon dioxide emissions, and possibly emissions of other kinds. This links to a proposal made below for further action by the economic regulator

7.6: the Commission supports action to improve the extent and rigour of environmental reporting. Action to that end taken by the economic regulator should incorporate appropriate licence conditions, rather than merely encouragement. In framing conditions or giving guidance about good practice the economic regulator should work in close conjunction with the Environment Agency and with the Scottish Environment Protection Agency. Reporting requirements under licence conditions need to be rationalised with the statutory requirement on electricity companies to provide environmental statements, and so also the respective roles of the economic regulator and the Environment Agencies in both cases. Particular functions that environmental reporting should serve include verifying that the reductions in carbon dioxide emissions expected to be achieved as a result of specified measures (the Energy Efficiency Standards of Performance Scheme would be an example) are in fact being achieved, and obtaining companies' assessments of what more they might do to reduce carbon dioxide emissions, in an appropriate framework and with appropriate incentives. Ofgem itself should certainly report annually on progress towards fulfilling its commitments in relation to the environment

7.7: the Commission supports closer co-operation between Ofgem and the Environment Agency, and also between Ofgem and the Scottish Environment Protection Agency. The other proposals in this paragraph for clarifying relationships and respective roles are clearly sensible

7.8: these proposals about Ofgem's own working practices are clearly sensible.

Additional proposals for action
The Commission welcomes the indication (in paragraph 1.15 of the discussion paper) that Ofgem wishes to respond positively to Energy - The Changing Climate. There is a further key role for the economic regulator in beginning to devise, in consultation with government, the mechanisms that will be needed in the longer term in order to help bring about, and then regulate effectively, the very different energy supply system that will be needed in the longer term. This task should form part of Ofgem's initial environmental action plan.

Other bodies with responsibilities for improving efficiency in end use of energy, such as local authorities, have found difficulties in obtaining access to information on energy use and energy efficiency held by energy companies. It should be part of the environmental action plan to devise and implement procedures for the supply of such information, consistent with reasonable requirements for confidentiality.

Some suppliers have offered tariffs which encourage wasteful use of energy, for example by offering house buyers free energy for a period or by offering incentives such as air miles in proportion to the amount of energy used. The environmental action plan should include measures to stop suppliers offering tariffs which have such environmentally damaging effects.

Steel House, Westminster

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