German heavy energy users to be exempt from ETS costs

The UK Government is currently consulting on its proposals for compensating heavy industry from costs incurred by Contracts for Difference.

Energy-intensive industries such as steel and cement makers in Germany will be compensated for higher electricity costs due to the EU Emissions Trading Scheme (ETS), following a decision by the European Commission yesterday.

The decision paves the way for similar one on state aid proposed by the Treasury for costs generated by Contracts for Difference under Electricity Market Reform proposals.

Heavy energy users have been lobbying furiously for such support in order to prevent what is called 'carbon leakage', or the transfer of the same industrial activities to less regulated parts of the world as a result of the higher costs of operating in Europe due to the ETS.

A statement from the European Commission said: "The Commission's investigation found that the scheme... would effectively prevent carbon leakage while keeping competition distortions to a minimum".

A proposal for a separate €40 million compensation scheme for non-ferrous metal producers in Germany, which that nation introduced unilaterally in 2009, was rejected by the EU executive.

It argued that the German government had not provided sufficient evidence to support a case that carbon leakage had occurred and that "would favour very selectively only eleven German beneficiaries to the detriment of competitors in the internal market".

The approved scheme is back-dateable to January 2013 and also relates to support offered in Germany.

The Commission's investigation found that the scheme, "in applying the harmonised methodology of the ETS guidelines, would effectively prevent carbon leakage while keeping competition distortions to a minimum".

In May 2012, the Commission adopted guidelines on how Member States can support industry in the context of the Emissions Trading Scheme (ETS).

British proposals for a similar scheme to exempt energy-intensive industries from the costs of Contracts for Difference (CfD) are contained in an amendment to the EMR bill, currently out for consultation.

Under this Government-regulated scheme, energy suppliers would not add the costs of CfDs to the charges made for the supply of electricity to high energy users, and has been constructed using five principles. It would:

be targeted at companies that are both electricity intensive and trade intensive

minimise distortions within the UK economy;

avoid perverse incentives, e.g. discouraging take-up of energy efficiency measures;

minimise the administrative burden for all parties;

minimise the costs to consumers outside of the scope of the exemption (both business and household) whilst meeting the policy objective.

The Government has already set out the eligibility for compensation from the indirect costs of the EU Emissions Trading Scheme (EU ETS), based on European Commission guidelines.

It is also lobbying Brussels for urgent structural reform of the ETS, arguing that the best way to address carbon leakage would be an ambitious international climate agreement. This would create a level playing field for industry inside and outside the EU.

However, the Government meanwhile supports the allocation of free allowances under the ETS, in the absence of a global climate agreement, as it "gives relief to sectors at significant risk of direct carbon leakage, without raising barriers to international trade".

Image from thinkstock

Caption: The Government is currently consulting on its proposals for compensating heavy industry from costs incurred by Contracts for Difference.

Energy efficiency is cheapest energy reform, say top UK Government officials

 Chris Pook, Deputy Director of Green Economy, at the Department of Business Innovation and Skills (BIS)

Energy efficiency was affirmed by Government officials from two departments on Tuesday as being by far the cheapest way of meeting the UK’s climate commitments and decarbonising its electricity grid.

Speaking at The Energy Event at Birmingham's NEC, Trevor Hutchings, Head of Strategy and Delivery, DECC, and Chris Pook, Deputy Director of Green Economy, at the Department of Business Innovation and Skills (BIS), both referred to sources of research, including studies by McKinsey, which show that most measures to reduce energy usage have negative costs, compared to building more energy generation plant or carbon capture and storage.

Trevor Hutchings said that DECC's Energy Efficiency Deployment Office (EEDO) is still compiling its evidence base, since its formation earlier this year, and will publish its recommendations in the autumn.

The key challenges, he said, were how to drive innovation to cut costs of both manufacturing and installation, and how to speed up installation.

Thinking up ways of getting the public onside and engendering behaviour change to make it the social norm for people to save energy, is also part of EEDO's work.

Hutchings said that he regarded it as an early success that the UK had played its part in the negotiation of the Energy Efficiency Directive.

This deal, struck in June, was formally adopted by the European Parliament yesterday in Brussels. It clears the way for the Directive to enter force by the end of October, and sets a voluntary 20% energy saving target for the whole of Europe.

However, earlier this month, Greg Barker cast doubt on whether the UK had really signed up to a 20% target, when he responded to a Parliamentary question from Zac Goldsmith by saying that the target “applies to the European Union as a whole. The UK does not currently have a target to reduce primary energy consumption by 20% by 2020 relative to business as usual.

"Under article 3 of the Energy Efficiency Directive, the UK is required notify the European Commission of its indicative target for final energy consumption in 2020 by 30 April 2013."

EEDO will play its part in overlooking the implementation of the Directive, Hutchings said.

The Coalition for Energy Savings believes that the Directive is only a first step towards making energy efficiency the prime consideration for European energy policy. It believes it can secure at least 15% energy savings by 2020, up from the currently projected 10%.

“It is the first time that the EU has established binding annual energy savings targets, combined with a broad range of new energy efficiency improvement requirements covering the whole energy system, from energy generation and distribution to consumption and building renovation," said Stefan Scheuer, Secretary General of the Coalition for Energy Savings.

Speaking for BIS, Chris Pook said that the department had signed up to the carbon budgets set by the Committee on Climate Change. "It aims underpin our policies, but determining those policies is complex," he admitted. “Electricity market reform, the Green Deal, and the carbon price floor, are all problematic."

The division in Government over energy policy is even more apparent since the Cabinet reshuffle, with Vince Cable's speech on his industrial strategy yesterday overshadowed by calls from business leaders to get the rest of the Cabinet on his side, if he wants it to be a success.

At this week's Energy Event, energy-intensive users expressed delight at the recent ministerial appointments. Andrew Bainbridge, Chairman of the Major Energy Users’ Council, said that at last they might "see some sense" in government energy policy. These users are worried that a planned carbon price floor will raise their electricity costs above those of European rivals.

The MEUC is encouraging its members to take on board energy efficiency, however, and launched yesterday the third in a series of workbooks linked to training sessions, called How To Accelerate Your Energy Efficiency Training Programme, written by Dr John Ryan.