Renewables and efficiency take priority in new energy policy

The UK Department of Trade and Industry (DTI) has finally published its long-awaited Energy White Paper, setting out the Government’s long-term strategy on energy to the year 2020 and beyond. The White Paper underlines the growing convergence between energy and environment policies, placing climate change firmly in the centre of future energy policy.

Despite criticism that the White Paper is short on specifics, in some quarters it is being supported as an encouraging high-level policy statement embracing renewable energy and energy efficiency, which has Prime Ministerial backing and on which the necessary detail and certainty can be built. An alternative view might be that the Government’s new energy strategy to a large extent reflects sentiments expressed more strongly and for some time now in Brussels on the importance of using renewable energy and energy efficiency technologies to tackle climate change. The recent Directive on the Energy Performance on Buildings is given as an example.

Energy White Paper

The White Paper is wide ranging. Measures proposed in the White Paper are intended to affect all businesses by creating an environment in which economic growth is decoupled from increased carbon emissions while ensuring ongoing security and diversity of supplies.

The White Paper starts by accepting the findings of the Royal Commission on Environmental Pollution and sets an objective of cutting CO2 emissions 60% by 2050. Technological change is seen as likely to play a significant part in delivering emissions reductions at this level. Market solutions such as emissions trading, trading in renewable energy and, possibly, combined heat and power certificates, taxation and tax breaks, supported by increased R&D funding and capital grants, are seen as the key mechanisms to deliver the cost-effective technology that will be needed.

Supporting statements from Prime Minister, Tony Blair, were timed to coincide with publication of the White Paper and demonstrate support for growth in the environment technologies and services industry. In a speech, he likened the long-term global threat of climate change to the immediate security threat posed by weapons of mass destruction. In a joint letter with his Swedish counterpart, Goran Persson, to the EU President he challenged EU leaders to commit to reductions in their CO2 emissions of the same order. The letter supports and builds upon the draft EU Environment Technologies Action Plan, designed to foster development of cost-effective environment technologies and services, by proposing that the EU should set further national targets for renewables and continue to work to support combined heat and power (chp).

The White Paper has been criticised for being short on specific measures. However the detail of how the Government proposes to deliver the strategy set out in the White Paper is to be set out in an ‘implementation plan’. The Government has committed to publish the plan within the next year and then to report annually on progress that has been made towards achieving the objectives set in the White Paper, as well as on any additional steps needed to remain on track. Interestingly, this commitment forms the basis of the recent Private Member’s ‘Sustainable Energy Bill’.

Energy efficiency

Energy efficiency is seen as the most cost-effective way of reducing CO2 emissions. Cost-effective measures are estimated to be capable of delivering approximately half of the reductions needed to achieve the Government’s greenhouse gas emissions reductions targets. The White Paper contains a reminder that the Treasury is consulting on specific fiscal measures to promote domestic energy efficiency (also picked up in April’s Budget) and Government commitments to:

• raise performance in the Building Regulations during 2005 (ahead of the implementation date for the EU directive on energy performance of buildings – on which, see below);
• support and work proactively to speed delivery of a number of new EU energy efficiency and labelling laws, including the proposal for a directive on the eco-design of end use equipment;
• setting up a working group with energy regulator, OFGEM, to explore how to create effective markets for energy services (where the service delivered is, for example, warmth rather than units of electricity);
• maintaining existing national targets for chp, but introducing chp targets for the Government Estate and, through the introduction of a project route, further enabling chp to participate in emissions trading.

Renewable energy

The Government acknowledges that despite the UK having vast potential, growth in renewables in the UK has been inadequate so far. The White Paper sets the ‘ambition’, rather than the firm target recommended by its Policy Innovation Unit, of generating 20% of electricity from renewable sources by 2020. The Government is committing to strengthen renewables policy, with measures including:

• an additional £60m in capital grants over the period 2002-2006;
• reviewing progress under the Renewables Obligation in 2005/6 and then elaborating Government strategy to 2020 (which, presumably, means setting targets to 2020);
• amending the regulatory framework to facilitate connection to the distribution network of an increasing number of small renewable and combined heat and power (chp) generators;
• addressing planning obstacles to renewables projects, to include revising planning guidance on renewables (to be published shortly) and working with the Ministry of Defence improve communication of their objections to wind farm proposals;
• urging regional and local government (those that have not already done so) to develop local policy to balance national energy policy against local/regional concerns, to set targets negotiated between local and national government and to develop detailed action plans on renewable energy and energy efficiency.

Energy market and the environment

The Government acknowledges that current market structures and regulation impact on the environment and, whilst firmly wedded to the current market system, the Government is committing to:

• set up with the DTI, the Department of Environment Food and Rural Affairs (DEFRA) and OFGEM a joint working group to consider and report on relevant environment issues;
• revise the statutory guidance to OFGEM on social and environmental issues in the light of the commitments and objectives in the White Paper to make the guidance more specific;
• introduce a statutory requirement for OFGEM to undertake an environmental impact assessment of all significant new policies (bringing it into line with other market regulators).

Nuclear

Since the Government feels that current economics make nuclear power unattractive and complex nuclear waste issues remain unresolved, it proposes no new nuclear build for the next five years. Beyond that, it proposes to keep the nuclear option open and to consider whether nuclear is needed to achieve climate change objectives. Subsequent publication of details concerning the amount of radioactive waste produced by UK nuclear reactors is, however,likely to fuel concern about the sustainability of nuclear power.

Emissions trading and energy taxation

Despite the conflicts with the UK emissions trading scheme that it will now have to resolve, the Government supports the EU-wide emissions trading proposal. It also supports further harmonisation and focussing of energy taxation policy to internalise environmental costs and comments suggest an acceptance that the UK’s climate change levy should be reviewed.

Partnerships

A Sustainable Energy Policy Network of those department units involved in delivering the White Paper’s commitments will be set up – to include the DTI, DEFRA, the Department for Transport, the Foreign and Commonwealth Office, the Treasury, the Office of the Deputy Prime Minister, the Scottish and Welsh Offices and devolved administrations, OFGEM and the Environment Agency.

Transport

The White Paper adds little in relation to transport. The Government is sticking to the principles of its recent policy paper, Powering Future Vehicles, and deferring policy decisions on aircraft emissions until publication of its Air Transport White Paper. However, a hydrogen fuel cell technology agency, Fuel Cell UK, is to be set up and there are indications that there may be additional support for biofuels and hybrid fuel-electric vehicles.

Waste

On waste, the Government is deferring any policy decisions until it publishes its response to the review of its Strategy Unit (formerly Policy Innovation Unit), “Waste Not Want Not”, into delivery of the Waste Strategy 2000.

EU Directive on the energy performance of buildings

But is this Government’s strategy ahead of or merely following thinking in Brussels? In truth, the answer is probably that it is both, to an extent. Energy efficiency now features prominently in the Government’s thinking although it has been the subject of Commission activity over a number of years and is central to the Directive on the energy performance of buildings adopted at the end of last year and to a further directive proposal due this Summer. Buildings, not counting industrial buildings, are estimated to account for approximately 40% of all energy consumed across the EU and, directly and indirectly, a substantial proportion of greenhouse gas emissions. Consequently, improving the energy performance of buildings can make a significant contribution to climate change goals. The recently published EU Directive on the Energy Performance of Buildings will introduce new obligations affecting new buildings, renovations and virtually all existing buildings. Implementation of the Directive will drive energy performance standards upwards, particularly in the UK.

Minimum standards

Under the Directive, the Government will have to set energy performance standards differentiating between different categories of building type and virtually all new buildings will have to comply with the new standards. The Directive also requires virtually all existing buildings to be upgraded to meet applicable standards, ‘in so far as technically, functionally and economically feasible’, if the useful floor area of the building exceeds 1000m2 and a ‘major renovation’ of the building is planned. The obligation to upgrade existing buildings could either require the energy performance of the whole building to be upgraded or, in certain circumstances, simply that of the renovated system or component. Certain categories of building may be excluded from the requirement to comply with these energy performance requirements, including places of worship and architecturally or historically important buildings.

Alternative energy sources

The Directive requires that consideration is given to alternative energy systems, such as:

• renewable energy technologies (for example, solar electric roof tiles or wall cladding);
• combined heat and power plant (boilers that generate both heat and electricity);
• district or block heating and/or cooling schemes (a central source providing heating and/or cooling to a number of building or occupational units); and
• heat pumps (for example, pumps extracting heat from the ground or residual heat from used air or water).

Where a new building is to have a useful floor area of more than 1000m2, the ‘technical, environmental and economic feasibility’ of incorporating such alternative energy systems will have to be considered and taken into account before the construction of the building starts. Buildings currently in the pipeline, where construction is not due to start until after January 2006, will have to comply with this obligation.

In the England and Wales, much can be done to implement this requirement by amendment of the Building Regulations. Some of the systems, however, will require consideration that falls outside the current scope of the Building Regulations and which may require consideration under the planning system. A consultation draft revision of the planning policy guidance note on renewable energy (PPG22) is due shortly although the alternative energy systems requirement of the Directive may require separate regulations or incorporation into general development orders to ensure appropriate consideration is given in all developments required under the Directive. The Government promises, in its Energy White Paper, to urge regional development bodies and local authorities to develop renewable energy and energy efficiency strategies and targets. In sum, the alternative energy systems obligation could mean having to justify to the planning authority any decision not to include such measures in a building’s design and, if the feasibility of such measures is not considered in the decision to grant a building planning permission, the permission itself may be open to challenge by judicial review.

Energy certificates

In England and Wales, energy performance certificates are already required under the Building Regulations in respect of new buildings. The Directive extends the certification concept to the regular energy certification of virtually all new and all existing buildings. Only limited categories of buildings (as mentioned above) may be excluded from this requirement.

A valid certificate of energy performance will have to be shown to the owner by the developer on construction of any new building, and by the owner to any prospective purchaser or tenant on the construction, sale or letting of any new or existing building. The certificate will have to be no more than 10 years old, although wary purchasers and tenants are likely to ask for certificates that are not just technically valid but also recent.

A certificate will include an assessment of a building’s energy performance and a comparison with the performance of an equivalent new building or similar benchmark. Each certificate will also include any recommendations for cost-effective measures to improve the building’s energy performance. Whilst these recommendations are not intended to be binding, they are likely to lead to a de facto obligation to implement the recommendations in at least two scenarios:

• where a prospective purchaser or tenant with a strong negotiating position is able to demand that recommended energy performance improvements are carried out to bring the building closer into line with then current legal standards or industry benchmarks; and
• where major renovation is undertaken of a building with a useful floor area over 1000m2, it will be difficult to argue that the upgrading requirement does not include recommendations on the certificate which effectively amount to an expert assessment that the specified measures are technically, functionally and economically feasible.

As a result of mandatory energy performance disclosure in virtually every property transaction, energy performance is likely to gain a much higher priority than it currently enjoys. All other factors being equal, prospective purchasers and tenants are likely to choose buildings with good energy performance over those with poor performance. Alternatively, faced with buildings that do not match current benchmarks and that may require upgrading if any renovation work is undertaken, they are more likely to use poor energy performance as a bargaining chip to negotiate purchase prices and rents downwards. In the UK, in conjunction with sweeteners that already exist for the property industry in the form of tax incentives, capital grants and the possibility of generating ‘credits’ to sell into the UK emissions trading scheme, the overall effect of the Directive should be positive.

Interestingly, in its Energy White Paper, the UK Government commits to raising the building energy performance requirements of the Building Regulations 2000 during the course of 2005. Meanwhile, the UK is bound to implement the Directive by 4th January 2006, and for England and Wales this will require amendment of the Building Regulations. Therefore, it will be interesting to see if the Government’s policy commitment will result in energy performance standards being set that are comparable with those of our northern European neighbours and whether any other measures will be introduced that go beyond the requirements of the Directive.

For further information please contact Tom Bainbridge on +44(0)20 7367 3174 or at tom.bainbridge@cms-cmck.com