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...


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...

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...

Carbon reporting became mandatory!

The UK Government has regulated for carbon (ore more precisely - carbon dioxide - CO2, methane -CH4, nitrous oxide - N2O), hydrofluorocarbons - HFCs, perfluorocarbons -PFCs and sulphur hexafluoride - SF6) reporting to become mandatory since the beginning of October 2013. The legislation was introduced as part of the Companies Act 2006 (Strategic and Directors Report) Regulations and requires companies to include in their Directors' report carbon disclosures for the financial years ending on or after 30 September 2013. The legislation affects all UK quoted companies which essentially includes all UK incorporated companies whose equity share capital is listed on the Main Market of the London Stock Exchange UK or in an EEA State, or admitted to trading on the New York Stock Exchange or Nasdaq. 

Relevant guidance has been published under the broader "Environmental Reporting Guidelines: Including mandatory greenhouse gas emissions reporting guidance" scheme. The current guidance allows a lot of freedom with regards to the format and layout that the reporting should take place. Therefore companies that are already using the Greenhouse Gas Protocol Corporate Standard  or even ISO 14064-1 will not be surprised by the requirements. However, it is expected that the reporting framework will be reviewed by 2015 and 2016 with the intent to enhance its scope. 

This development can be criticised widely; lack of mandatory and comparable reporting framework; lack of commitment or even strategic reference to reducing emissions rather than just merely reporting them and the list can go on.  But the fact is that this initiative puts the UK in the lead of climate change action in the world since this is the first and only scheme currently operational in the world. The consequences of this regulation will not be limited in the UK. Quite clearly the scheme involves companies with a strong presence in international stock exchanges and their reporting in one region (UK or even the EU or EEA) will not leave unaffected their activities in the rest of the world. 

Some may even argue that the majority of companies affected were already reporting their greenhouse gas emissions. But, Delloit's "UK Carbon Reporting Survey - Lip service or leadership?" shows that this is only partially true. Indeed a very large number of companies choose to report on their emissions but  only a fraction of them does so in a transparent, accurate and complete way. Very rarely companies provide details about their emissions calculation methodologies or have their reporting verified by external auditors.

Nothing can be improved if it's not measured. The Government has made a first step in the right direction and it looks like more developments will follow. 

Capacity market and strike prices

Earlier this summer the UK Government issued a press release about the new energy infrastructure investment and reforms vital to “keeping the lights on and emissions and bills down”. In more detail, the Government expects to unlock £110 bn of investment and secure 250,000 jobs until 2020; it expects to achieve this with two main policies. The first is the Strike Prices for renewable technologies, which aims to reduce exposure of renewable generators to volatile energy prices. The second is the introduction of a capacity market, which the Government hopes will incentivise a new generation of gas plants that will be needed to support the increased role of intermittent sources.

These policies supplement the Electricity Market Reform which introduced the Contracts for Difference (CfDs) and is part of the more comprehensive Energy Bill. The strike prices for renewable energy recommended by the Government will shield investors from volatile wholesale electricity prices and in this way encourage investment. The strike price for offshore wind is £155/MWh for 2014/15 declining gradually to £135/MWh in 2018/19 while the respective figures for onshore wind are £100/MWh and £95/MWh. Solar PV projects are set to receive £125/MWh declining to £110/MWh for the same period. There are strike prices for most types of renewable sources apart from tidal range, which, according to the Government, will be further considered by DECC.

A certain degree of number-crunching is required to compare the CfDs with the existing RO and FiTs, but the Government claims that the support given by CfDs is in line with that offered by the existing schemes. The main advantage now is protection against wholesale price volatility. Price volatility and uncertainty over climate change and renewable energy targets have been blamed for deterring investment worth billions of pounds in the UK. This is not a UK specific issue, but is reported across the EU, where slow economic recovery has made governments hesitant to commit to new targets. It can therefore be assumed that if the financial support offered by the UK Government removes uncertainty in addition to being similar to existing schemes, the results will be positive.

The predicted increase in renewable energy in the UK's electricity fuel mix has forced the Government to introduce a capacity market, whereby certain generators are paid for the essential service of stand-by operation. The increased role of intermittent generation makes this auxiliary service particularly valuable for the system operator, and the introduction of the capacity market acknowledges that. Quite disappointingly, Davey was fast to name gas-fired power plants as the main benefactors of the capacity market. Plants that could use renewable energy to offer capacity services have not been mentioned and they will be examined on a case by case basis by DECC. Unfortunately, that means that there is no news for medium/large-scale hydro and tidal range plants. Their dual role of renewable energy generation and storage has been overlooked in favour of gas (and the Government's ambitions for a shale gas sector boom in the UK).

Shale gas for the UK?

It's already been a few years since shale gas started making headlines in mainstream media. Despite some first doubts now it is clear to everyone that shale gas is a "game changer" for the US energy supply. Increased gas supply meant that prices plummeted and for the first time the link between oil and gas price was broken. Gas is a very flexible resource as it can be used for power generation with very efficient combined cycle gas turbines, for industrial processes, for domestic heating and cooking or even for transport. When burnt it is cleaner than any other mainstream fossil fuel; therefore the benefits of lower gas prices can be felt across every sector of the economy. Low energy prices make the US an attractive place for energy intensive industries, some of which have already started relocating. 

It all sounds rosy about shale gas but leaving open space for the industry to operate freely (see lack of regulation) meant that shale gas operations caused numerous light tremors and in some cases were accused for water contamination. Drilling for shale gas makes use of hydraulic fracturing which is the source of all the aforementioned problems.

What about shale gas in the UK then? Do we have enough resources here? Can we drill for them in ways that will control and limit the environmental impact? Should we just let shale gas where it is because more gas will only keep us hooked to fossil fuels for longer? Recent reports show that although the UK is not among the top shale gas countries outside of the US, the indigenous reserves are not negligible. Even more recently the British Geological Survey estimated the total reserves to be at 40 trillon cubic metres (tcm).

I'll straight-forward say that if we can control and limit the industry's environmental impact then there is no good reason for not drilling. Why?

With UK's conventional gas extraction being pretty low while US LNG is ready for shipments there is no doubt that the UK gas intensive industry will sooner or later start importing. Centrica already signed a 20+10 years contract for gas deliveries starting in 2018. That's shale gas converted to LNG. Although I have no proper estimations it is fair to assume that the embedded emissions of imported LNG from shale gas is higher than indigenous LNG. I wonder how the embedded emissions comparison looks like for imported LNG from conventional Qatar's sources and indigenous shale.

Will a success story for shale gas lock-in the UK in a high carbon (gas) future? There is no need to go very far to realise that this is not necessarily the case. The US, with huge coal reserves and production made a fast shift as soon as a new and better resource (shale gas) became available. In the same way, the UK will shift away from shale gas as soon as other, better resources (wind? wave? nuclear?) become available.    

The government should be wise enough to regulate the environmental impact of the industry, arrange for community compensations and do not favour the gas industry against the low carbon energy industries.

Is your company a challenger or a leader?

With so many companies already stepping up efforts to adopt sustainable practices it is not a surprise that some are doing better than others. But, how is sustainable practice adoption really measured? How do we actually know how well (or how bad) their performance is? Up to a large extend sustainability corporate performance is all about reputation. Even those tangible benefits that companies expect to achieve by engaging in sustainable practice are in fact just a matter of managing their reputation. This doesn't necessarily mean that companies only talk the talk but rather that they talk the talk at least as much as they walk it.

Brandologic teamed with CRD analytics to map the sustainability performance and the stakeholder perception of 100 prominent world companies. The evaluation classifies companies in one of four categories Challengers, Leaders, Laggards and Promoters in what they call Sustainability IQ Matrix. 
Leaders are those companies that perform well in ESG (Environmental, Social and Governance) and are perceived to do so by their stakeholders. Challengers are companies that even though they perform well, they do not manage to get enough credit for their performance. In contrast, Promoters are those companies that get more stakeholder credit than what they deserve and finally Laggards are companies that do not take a keen interest in ESG.

Apart from the difficult to read graph pasted above, there are industry specific graphs that do well in providing you with a clearer picture. Not surprisingly, I've taken a keen interest on the one focusing on the energy (oil and gas) sector. There I've noticed that Exxonmobil, Shell, BP and Chevron are actually doing bad in managing their reputation even though they're not that bad in their sustainability practice. Obviously,
Deepwater Horizon accident must have something to do with refreshing the oil and gas sector's bad name (and unfortunately it's not the only one...).

There's also a category for industrial companies and transportation in a rather inconvenient joint presentation. I'd rather focus on the airlines here and let you know that they all perform badly. However, some manage to convince their stakeholders and their credentials. American Airlines and Lufthansa seem to get more credit than they deserve even though they do not perform significantly better than British Airways and even Japan Airlines (which actually performs the worst of all). As far as transport is concerned you'd probably prefer to use UPS than FedEx based on their ESG performance. Mind that even though UPS performs a lot better than FedEx they receive less credit. Something for the UPS management to pick up urgently!

In the detailed methodology section of the sustainability leadership report  I've noticed that Environmental, Social and Governance performance are not weighted equally. Instead, the main weight (50%) is on social responsibility with the rest (50%) shared between Environmental and Governance. Makes me wonder how the results would look like with equal weights or even more if Environmental was on the 50% scale.   

Sustainability reporting becomes mainstream

Just before the end of 2012 news about "Environmental reporting more than doubles" made headlines. There has only been little (if any) discussion about this issue which deserves more attention. To begin with, the data on which the news is based reflects on much wider sustainability and responsibility trends, rather than just "environmental reporting"; the latter is part of the agenda for responsible business.

The findings are attributed to research made by the Governance & Accountability Institute, (G&A Institute) which also serves as the data partner for the Global Reporting Initiative (GRI) in the US,UK and Ireland.

In detail, only 19% of the S&P 500 companies reported in in 2011 while in 2012 the reporting companies were 53%. Similarly, in 2011, only 20% of the Fortune 500 companies produced reports in contrast to 57% for 2012. It is therefore fairly obvious that sustainability reporting is being adopted by large corporations rather rapidly. It also becomes clear that for the first time companies that report are the majority.

So, does reporting provide reputational benefits for companies? 

G&A Institute's results show that although there is a positive association, the answer is not that simple. 58% of the companies included in the Newsweek's Green rankings are reporting; however, another 42% are not. The Corporate Responsibility magazine's list of the 100 best Corporate Citizens includes 47 companies that are not reporting. It's only the Ethisphere's list of the World's most Ethical Companies where 76% of those included are reporting. 

Apart from the direct reputational benefits for companies, they can be included in indices with a focus on sustainability and responsible citizenship. Most exchanges operate a number of such indices; the World Federation of Exchanges (WFE) reports that there are at least 75 such indices in the main exchanges internationally. So, are the reporting companies more likely to be included in the high profile indices for sustainable and responsible business? 

On this issue reporting seems to be a strong determinant. Out of the companies listed in Dow Jones Sustainability Index (DJSI) North America, 85% produce reports the vast majority of which (91%) are based on the GRI standard. The DJSI World is dominated by companies that report by 98%. Finally, the results are pretty similar with the NASDAQ OMX CRD Global Sustainability 100 where 97% report their sustainability performance.  

The benefits from reporting are generally intangible, since they do not translate directly into profits. However, it is important to see that the effort that companies put in developing that aspect of their communications is acknowledged. Any vagueness should be not be attributed to the market not picking up the signals but to the lack of a single definition or methodology for responsible and sustainable business reporting.

Companies may choose to  discuss their environmental and social impact in qualitative terms or disclosure quantified details about their resource management and emissions. Standards like the ones provided by GRI or the Carbon Disclosure Project (CDP) allow corporates and organisations to produce in depth reports. Selecting between a rough qualitative or a detailed quantitative approach defines the degree of commitment and the expected public acknowledgement that companies should expect.

Ethical markets defy recession

Since the beginning of the financial crisis it has been assumed that the environmental and responsible business agenda would be pushed backwards. In fact, recession and the threat of it, were used in a number of occasions to justify lack of ambition in policy interventions. However, it seems that households, many of which are finding it hard to pay the bills, are moving to the right direction.

While the British economy was balancing between zero and negative growth, business in ethical goods markets was increasing. The results are consistent in a wide range of products and services. According to figures reported by Co-operative, ethical consumption was worth £47.2bn in 2011, a significant growth from £35.5bn in 2008 and £18bn in 2001. Specifically the market for ethically sourced groceries was worth £7.5bn, a growth of about 350% since 2000. Sales of domestic consumer goods promoting efficient use of energy grew by nearly 450% at the same time while over £1bn was spent in 2011 on "green cars".

The sustainable and ethical segment of groceries grew by 7.8% on the year to 2011. Ethically sourced fish and Fairtrade products championed this trend as sales were increased by 31.5% and 24.1% respectively. Apparently, when asked, 9 out of 10 consumers recognised the Fairtrade logo. In groceries, between 2010 and 2011 growth was strong in free-range poultry and eggs by more than 5%. However, the sales of organic products, while generally presenting a growth of 250% in the decade, followed a slight downwards trend between 2010-2011.

Co-operative's research also found that between 2000-2012 there was an increasing trend among people who reported getting engaged in acts broadly aligned with the ethical agenda at least once annually. Some examples include people who bought certain products primarily for ethical reasons (42% up from 27%), actively campaigned on environmental and social issues (24% up from 15%), felt guilty about unethical purchase (31% up from 17%), actively sought information about a company's reputation (33% up from 24%). However, the number of those who bought a product or service based on a company's reputation was slightly decreased (50% down from 51%). Also, the number of people who recommended a company on the basis of its reputation was reduced from 52% to 41%.

While there is no doubt that ethical business is growing it is now more than ever the combined efforts of retailers, governmental policy and consumer behaviour driving that growth. Take for example micro-generation (that is mainly domestic electricity generation) which grew by a staggering 286.3% in the year to 2011. This probably includes the boost in rooftop photovoltaic panels, for which the government used to provide generous subsidies. Moreover, the growth in green cars is influenced by the road tax scheme that provides tax breaks for low emission cars. Surely, the availability of affordable green vehicles helped as well. Similarly with groceries, all major retailers take pride in promoting sustainable and ethical goods. In conclusion, with the contribution of all stakeholders the performance of ethical markets remains strong.



This entry was re-posted at the blog of Norwich Business School at UEA.