Wednesday, 22 July 2015

Is the new road tax a good idea?

The Chancellor's 2015 update budget surprised many, some of us with the new Vehicle Excise Duty (VED) that George Osborne introduced. Even though one has to acknowledge the simplicity of the new rules, this looks more like an oversimplification which will be bad news for the environment. 

Since 2001 the UK has used a Vehicle Excise Duty with a clear objective in encouraging consumers to consider environmental impact of vehicle use into their purchasing decisions. Roughly this looks like this (with minor variations for alternative fuel vehicles): 

Band CO2 (g/km) Annual Tax (£)
A Up to 100 £0
B 101-110 £20
C 111-120 £30
D 121-130 £110
E 131-140 £130
F 141-150 £145
G 151-165 £180
H 166-175 £205
I 176-185 £225
J 186-200 £265
K* 201-225 £290
L 226-255 £490
M Over 255 £505
This approach worked well in the past but more recently it has received criticism for two reasons. 

Firstly for the fact that it narrows down the environmental impact of vehicle use to the vehicles CO2 emissions ignoring all other relevant pollutants such as NOx, PMs, VOC etc. The focus of this criticism has been that although petrol and diesel vehicles perform similarly (perhaps slightly more favorably for diesels) when it comes to their CO2 emissions, diesel vehicles contribute significantly higher PMs. It is fair to say that new Euro 5 and Euro 6 diesel vehicles have PM filters that capture PMs successfully when they are maintained properly. In addition to that as identified in recent real conditions research diesel engines tend to emit significantly higher NOx emissions in real world traffic. All that means a lot for the UK where 9 urban cities have been named by the World Health Organisation (WHO) for breaching air pollution safety limits for PM10.  

Secondly the previous vehicle tax regime has come under pressure by the Government who realised that already a quarter of new vehicles are not liable for any VED as they fall below the 100g/km threshold. The Government also realised that continuous energy efficiency improvements and wide adoption of hybrid and plug-in hybrid powertrains will result in a substantial decrease of income. Therefore the new VED (valid 2017 onwards) excludes from any tax only zero emissions vehicles. Everyone assumes that this category refers to electric motor vehicles only, excluding for example plug-in hybrids but I have not seen any clarifications. The Government has previously encouraged plug-in hybrid vehicles by including them in £5000 purchase grant scheme and will continue to do so with the updated scheme post-2015. All non-electric (or non- plug-in hybrids) will pay a flat £140 with cars costing higher than £40,000 paying an extra £310.  

So, is this a change for the better? Will it encourage adoption of low emissions vehicles?

I would have much more preferred to see a new regime only intervening on the tax costs bringing them up by a couple or so bands in order to maintain Governmental income as required. That would have for example introduced a separate zero emissions category (for electric only vehicles) that would pay zero tax and ask for increased tax progressively with higher emissions. A system like that could for example charge ~£60 for a second generation Prius (currently £10 ~ 104g/km); ~£40 for a third generation Prius (currently £0 ~ 89g/km) and £20 for plug-ins (currently £0). This would certainly encourage the hybrid, plug-in hybrid and electric segment of the market develop accordingly. At the same time it would encourage combustion engine manufacturers to produce more efficient engines (like they already do very successfully). 

If plug-in hybrids are included in the zero rate then the Government has successfully managed to encourage the zero and nearly zero emissions market segment. However, introducing a flat £140 tax for everything else only looks into Governmental income without advocating any policy or encouraging innovation or lower emissions. Simply put, road tax would be the same for a hybrid mini car that emits 75g/km and a large SUV that emits 200g/km. This is not an environmental friendly policy...

Furthermore, if my assumption is not correct and plug-in hybrids are not included in the £0 band then they will also be treated equally to all other conventional vehicles despite their clear emissions savings. 

Most electric vehicles do not provide a suitable substitute for combustion engine vehicles mainly due to range and cost. This will require several years to change. Despite technological improvements we will not see £15k electric vehicles that can do 300-400 miles at a charge and we will not see fast charging points everywhere in the next 3 years. Even if we were to see these developments followed by a massive uptake of electric vehicles, the electricity generation and supply infrastructure of this country would not be able to cope. 

The Government has rushed into a policy that does not provide the right incentives that are needed today; the incentives that will encourage adoption of lower emissions vehicles and the gradual exclusion of old combustion engines from the market.

Wednesday, 24 September 2014

TILOS project - Horizon 2020

Very proud to be part of this ambitious and promising research bid with a truly unrivalled consortium! 

Monday, 22 September 2014

A second dash for gas in the UK?

Most people are aware of the UK's "dash for gas" of the 90s. While controversial, mainly with the loss of jobs in the broader coal sector it has offered the country some reasonable benefits; namely in reducing electricity sector emissions and modernising the electricity sector overall. Some may even go as far to argue that it "liberated" the country from a heavily unionised mining sector that was deemed to be a serious threat to power supply security.

More recently, there has been a somewhat global interest for a new dash for gas. That has been mainly fuelled by the US success in accessing previously considered as unconventional gas reserves. What is known to most, as fracking (or hydraulic fracturing and horizontal drilling technologies) has been credited for lowering gas prices in the US, making the country the largest gas producer and sparking hopes of complete US energy independence in the foreseeable future. Sounds too good?

In the UK, the Coalition Government has been keen to revive the country's dash for gas era and at the same time replicate at least some of the successes of the US experience with shale gas. In this post I will just list a few of the related policies that demonstrate the Government's gas bias.

Shale gas
It does not take much to understand that this Government really wants to promote shale gas in the UK. Chancellor George Osborne puts together the "most attractive tax breaks in the world" for the shale gas industry, while cutting subsidies for the most promising of renewables. If case you had any, David Cameron should have left no doubt about the Government's intentions when he took the case for shale gas on his shoulders. Since the UK's population density was seen as one of the main obstacles in developing shale gas the Government decided to find a solution. How? by allowing drilling companies right of access underneath your house, for as a long as drilling is at least 300m deep. A target easily attainable by the shale gas industry.

You may have thought that's about enough support for the shale gas industry, but the UK Government did not think so. Imagine (and it's not hard to) that some shale gas drilling operations fail and causes widespread environmental pollution. It has happened in the US and it can happen in the UK. The small drilling companies will easily go bust and then it's going to be the British taxpayer paying for the environmental disasters. This is not a very good incentive for drilling companies to improve their safety record me thinks... Discussing the shale gas case is not the focus of this post; that is a topic I will return to quite soon. However, the Government's support for shale gas is quite clear.

Gas-fired power stations
It is true that as far as fossil fuel-fired power generation goes, Combined Cycle Gas Turbines (CCGT) are the most environmentally friendly option we have. It can be argued that we also have Carbon Capture and Sequestration (CCS), but its commercialisation may be decades away. In the meanwhile the UK power sector requires £110bn of investment to substitute its old coal and nuclear power stations.

The Government's preference is, again, with gas. The expectation is that new power stations will be allowed to emit up to 450gCO2/kWh; a target which is easily achievable by CCGT systems. Any gas power stations will be exempt from potential new targets until 2045. In the meanwhile, planning for decarbonising the UK economy by 80% until 2050 show that the electricity sector should be largely decarbonised by 2030. All that when reducing subsidies for onshore wind and solar energy. The result will be to lock-in the UK economy in expensive, gas-fired power generation and gas imports.  

Capacity market
Faced with a capacity crunch, the Government decided to create a capacity market.This market should ideally incentivise power stations to meet peak-power demand when needed. Because of their flexibility, a significant segment of this market will be met by open cycle gas turbines (most often these are different than the CCGT power stations). However, the demand-side response (DSR) systems can also play a very important role. Their contribution is well recognised and used in the US and elsewhere. Demand-side response systems offer an aggregated service to the grid which means that they interrupt certain eligible loads (consumptions) when the grid cannot cope with the demand. This service has widespread environment and financial benefits and is a first steps towards a smart-grid.

Even though the Government decided to allow DSR providers to enter the capacity market it also made sure to put them in a disadvantage by allowing them to bid for only one year contracts (instead of up to 15 years for gas-fired providers). As a result they are losing out in providing competitive prices and securing long-term income. It has also forced them to either take part in the capacity market now (Transitional Arrangements) or in the enduring market (from 2018 onwards).

One more way to make sure we are locked-in to an expensive and imported gas-fired future...

Friday, 29 August 2014

The expensive levies that were not...

As energy prices in the UK keep rising we have come to realise that between 2010 and 2013 the rise reached 37%. Not surprisingly the energy industry (see the big six) were quite fast to blame the "Green Levies" for the soaring energy prices. Right... you may think; that nearly makes sense. After all you must have heard of the subsidies that support the operation of wind and solar farms and the UK; they must have something to do with your rising bills or not really...

Chart _1
I am copying the above graph from the excellent carbon brief blog which you can find here. These are cost estimates of the energy companies for the social and environmental levies. That's at least about £110 on the average household. Now even for British Gas (see graph) that does not exceed 10% of the average UK bill. How come its the sole most mentioned reason for our expensive energy bills?

At some point the figures were even backed by the Coalition Government which went as far as saying that they may soon reach £194 by 2020. This time the estimations are not just about the Green levies but also about social levies; the latter mostly referring to the Government's ECO scheme which was obliging energy companies to offer energy efficiency improvements to low income households.

As you can imagine the energy industry was pretty happy to eventually have their nemesis aka green and social levies removed. So happy, Ed received a thank you letter! In the meanwhile ONS (Office for National Statistics) reported a record 31000 excess winter deaths, at a 29% annual rise. Was anybody happy about this I wonder? Probably not the energy poor people that would have their houses insulated if it wasn't for scaling back the ECO scheme.

But, that's OK... it cannot be that poor people expect everything from the nanny state (just being ironic!). At least the rest of us got a good deal with the £110 savings that the energy companies passed on our bills. Ha! Whose savings??

After being promised that energy bills would be reduced within weeks. By how much? We were told by £50 on average. Why not £110? Nobody knows... or maybe we know that instead of finding a way to force the energy industry to lower bills, the Government let them enjoy windfall profits which may reach £2bn in 3 years.Were your bills reduced btw? By £110? maybe by £50? or just increased again?

A quick recap therefore would read like: the Government has just offered energy companies a few billions which took away from energy poor people (and support from renewable energy projects) justifying its actions by falsely promising lower bills to the rest of us.

Well done guys...

Monday, 18 August 2014

Green energy and jobs... oh and the EU...

Reading on The Telegraph yesterday I found out that "EU green energy laws 'put 1.5m UK manufacturing jobs at risk'". Now, this is mainly The Telegraph repeating a report of the Business for Britain (BfB) Eurosceptic group.

The storyline that the authors put together is that the EU is the source of green energy laws and these laws increase energy costs which eventually threaten the profitability of energy intensive industries which may leave the country as a result and leave behind them unemployed people...

Is this exaggerated maybe?

I should first of all clarify that:

1. Yes, there are energy intensive industries in the UK (and the rest of Europe) and yes, they would love to have low energy prices. In fact, I would also love them to have low energy prices, at least at levels that they would prefer to stay in the UK than leave.

2. Yes, that's an important debate especially when you realise that it's not just the low Chinese energy costs we're competing against but the very low energy costs available in the US (there's a link to shale gas on that matter but I will come to this at a later post). So it's not any more a decision between establishing factories in developed or developing countries but a direct comparison between developed economies.

and then add a few thoughts and observations to the debate:

a. The main Green Energy Laws that the article cites are really one, the Emissions Trade Scheme (EU-ETS). The Renewable Obligation (RO), also mentioned in the article, is not quite an EU law at all.

b. Increased use of renewable energy, which is the aim of RO, is aligned with the current EU policies. Specifically, those looking to achieve an average of 20% share for renewable energy across the EU by 2020. However, a new binding target for renewable energy for 2030 is far from certain.

c. Coming back to what is actually EU law, the EU-ETS has so far recorded rock-bottom carbon prices. Did it really threaten any of the large manufacturers? Not the least, since they've all budgeted for significantly higher prices which were never realised. Whether EU-ETS will survive post-2020 remains an open question.

d. The UK, and not the EU, has the Climate Change Act 2008 which requires the country to reduce its carbon emissions by 80% between 1990 and 2050. This is achievable with a combination of measures relating to improved energy efficiency, increased use of renewable energy sources and nuclear energy. That's the most demanding, long-term climate change target that exists out there and makes the UK world leader in the Climate Change agenda.

So, at this stage let's get one thing right. It's not the EU green energy laws but the UK laws that drive renewable energy investment in the UK. Green energy laws is not a good enough reason to be Eurosceptic I think!

Next post will be about the green levies and their "huge" impact on our bills which was not. Probably linking it with how the Coalition Government handled this issue...