September 10 was the final day for submissions into the UK’s long-term energy policy review, and the same week the European Commission published a white paper on transport policy, which called for harmonisation of European fuel taxes to accelerate transportation competition. For the UK government, autumn will likely be a critical period, which will define both its domestic and European energy policy, and will also have an impact on its emission reduction objectives.
Tax harmonisation is critical to the development of an openly competitive European energy market. Although much of the recent debate on tax has been directed at gas and electricity markets these are, in some ways, secondary to transport fuel. In the UK, government taxation (through fuel duty) of diesel and gasoline has been one of the most sensitive energy issues. Although the UK has one of the most competitive fuel prices of European countries the high government duty element distorts this figure, making the overall UK price the most expensive in Europe.
The problem for the UK is that if it reduces the tax element to the European average, as proposed in the white paper, it will have a significant revenue shortfall, which will impact on its fiscal budgets. At a time when economic growth is slowing down and the UK is faced with key investment requirements into public services the loss of fuel tax revenue would be unwelcome.
Perhaps the Commission is mindful of this as the white paper is presented as more of a discussion document than actual policy. But dithering on the enforcement of tax harmonisation, which the UK will certainly vote against, will ultimately serve no purpose. The UK has come under consistent internal pressure in the past year to address its fuel tax policy. September marked the first anniversary of the UK fuel protests, which led to supply shortages and buying panic. But the government has clearly not learnt from this and, with a new five-year mandate gained in June’s election, appears to have reverted to its customary arrogance coated in saccharine and spin. For this reason the Commission should be applauded in raising the tax issue. While energy taxation should be the primary responsibility of individual member states and not Brussels it is important that the Commission apply pressure on the UK government to redress its energy tax policy.
The fuel tax issue will also be central to the UK government’s overall energy policy, which is due to be published shortly. It would appear that there are growing concerns that UK energy policy is becoming divergent from UK energy regulatory policy. This point was raised by Innogy, which claimed that a regulatory mandate to reduce gas and electricity prices via competition works against the government’s strategy of reducing environmental emissions. The concern is that current regulation is too short-term while energy policy has to be a long-term objective, and that the short-term regulatory initiatives – which have reduced wholesale prices and fragmented ownership of generation assets in the name of competition – do not fit in with longer-term energy policy.
British Nuclear Fuels Limited (BNFL) believes that with wholesale prices reducing further through competition the economics of new plant build are reduced. BNFL asserts that if such a situation is allowed to manifest the UK could follow a similar scenario to that of California. At face value these comments appear to be scare tactics designed to garner support for a fresh commitment to investing in new nuclear fuel generation plant. But these comments from BNFL should not be looked at in the short-term but in the context of longer-term energy security and diversity.
The UK government forecasts that it will become a significant importer of natural gas over the next decade. This import reliance will increase if the country’s current nuclear portfolio is not replaced before it is decommissioned, as the shortfall in baseload generation will have to be met by gas-fired plant. If such a policy is adopted then it is difficult to see how the UK can meet its environmental reduction targets. Maintaining nuclear power would greatly assist the government’s emission reduction objectives.
But there is another side to the emissions scenario. Transportation is the single largest contributor to greenhouse gas emissions, and therefore the government’s transportation policy has to be integrated into its overall energy policy if it is to meet its emission targets. And the UK emission targets have to be integrated into the overall European Commission targets for European emission levels.
In this respect the Commission’s white paper on transportation and fuel tax and the UK government’s energy policy are inextricably linked. Although the primary objectives of the government are rightly directed at the poor state of public services, it will have to direct much of its energies to energy policy, both in terms of diversity and security as well as taxation and government revenue. For this reason the next few months will be a critical period. The government has to put in place its energy objectives and strategies well in advance of next March’s Economic Summit in Barcelona, particularly as the Spanish government, which takes over the rolling European presidency in January 2002, has highlighted gas and electricity liberalisation as one of the five key areas it will push during its six month presidency.
Towards self sufficiency
The announcement by RWE, the German utility group, that it plans to launch fuel cell-based combined heat and power (CHP) systems for residential and commercial use by 2004 is a welcome endorsement of CHP technology and a positive contribution to emission reduction. It could also lead to a new era of domestic self-sufficiency.
According to RWE, CHP technology could save up to 70m tonnes of carbon dioxide per annum in Germany, with the new technology providing up to 80 per cent of electricity and 30 per cent of heating requirements.
It is not surprising that the German market is leading the new technology drive. Germany has been a leader in renewable fuel strategies and is keen to use technological advancement to meet its long-term energy security and emission reduction objectives. But other European markets, with the possible exception of the Scandinavian countries, have been less active.
The UK, which is keen to support the development of CHP technology, appears to be at odds with the new electricity trading arrangements. The CHP Association has been critical of government, arguing that the small scale of CHP plants and their relative inflexibility makes it disadvantageous within the new balancing regime of Neta. The UK is also committed to being a leader in domestic market competition and reduced electricity tariffs. In this respect it should look closely at the technology being developed in Germany. Not only can the new fuel cell technology be applied to CHP plant but can also be used in transportation, which is the largest single contributor of greenhouse gas emissions.