Home Index Economy & Environment Health Issues Press Releases
REVOLT Powerline Concerns Health Hazards Need UK Energy Policy

Response to:

Economic Instruments and the Business Use of Energy


Link to  the original consultative document (in  .pdf format)

 Economic Instruments and the Business Use of Energy

Response from Professor M J O’Carroll 31 July 1998

1. Assumptions

1.1 While fiscal neutrality is an understandable general aim, some exceptions are worth considering. In particular, where there is presently great waste with large savings to be made with the aid of government measures, there is a case for fiscal gain, so that the benefits of those savings are shared by the industries and the public purse.

1.2 The electricity industry is such a case. Indeed the waste can be conservatively estimated in excess of 11 billion per year at wholesale prices, almost half of which could be economically recoverable [1]. This could be a fiscal opportunity.

1.2 While exemption of domestic consumers from further net taxation is politically understandable, there is a case for discrimination between extravagant and prudent domestic consumers as long as the net tax effect is neutral. Therefore it is not necessary to have total exclusion.

2. A lost energy tax (LET)

2.1 Energy is sometimes a commodity consumed at a particular point, but it is also a commodity developed, refined and passed on through a chain of users each of whom may consume or waste a proportion of it. In the electricity and fuel processing industries, gross usable energy content may diminish as the product is processed, although of course the financial value increases. For example 50 to 65% of primary fuel energy may typically be lost in generation at power stations, a further 2% in transmission and 7% in distribution.

2.2 It is important that the scope of an energy tax (Question C2) should include these energy transactions and not just the direct consumer. There is a case for considering a Lost Energy Tax bearing upon all companies handling energy in the chain, reflecting the losses of the energy they handle as well as their own direct consumption, rather like a negative VAT.

2.3 The problems of downstream/upstream taxation (Questions C4 - C6) might be overcome by a LET. It would discriminate between generators at their stage in the chain, and charge end-users for energy consumed, while allowing domestic users to reclaim LET like VAT-registered businesses.

3. Electricity

3.1 A full LET could be severe on power stations if it were to compare with the wholesale price of energy which they waste. Although profits in the electricity industry have been extremely high, existing power stations may find difficulties in accommodating a severe new tax which was not anticipated in their business plans and medium-term contracts. A fiscally neutral possibility would be to tax against an average benchmark, with tax relief for the more efficient plant. However this is an area where some net fiscal gain might be reasonable.

3.2 Domestic electricity consumers might be allowed full LET reclamation. It would be difficult to construct a fair alternative with part or full LET charged against an average consumer benchmark for electricity alone, since overall use of energy should be taken into account.

4. Other instruments

4.1 The very large amount of waste in the electricity industry is largely historical. The opportunities for savings would rely largely on the development of CHP with small generation units distributed in areas of demand, as reflected in emerging government policy. Unfortunately the industrial trend is in the opposite direction, with more large power stations (in increasing surplus and with hidden energy costs in construction and infrastructure) increasingly in the far north to serve net demand in the far south [2].

4.2 Electricity regulation has been too weak and has allowed market distortion to give incentives to the industry for uneconomic developments. The moves towards cost-reflectivity in the 1996 Transmission Price Control Review were too little too late; they go only a very small part of the way and even that is phased over time. Regulation should be more firmly cost-reflective. General principles for regulation are suggested in [3].

4.3 Consents under the Electricity Act (sections 36 and 37) provide a further instrument which should be used in support of government energy policy, particularly the promotion of CHP and renewables. This will require selectivity of power stations according to location [1].

M J O’Carroll

Response to the House of Commons adjournment debate 24 July 1997
This contains a lot of information about the Economic and Environmental concerns.

Home Index Economy & Environment Health Issues Press Releases