Je Quill Office f Rail Regulatin One Kemble Street Lndn, WC2B 4AN Hannah Devesn Regulatry Refrm Specialist Netwrk Rail Kings Place, 90 Yrk Way Lndn, N1 9AG Email:hannah.devesn@netwrkrail.c.uk Telephne: 020 3356 9482 28 March 2013 Dear Je Respnse t ORR s Peridic Review 2013: cnsultatin n a freight-specific charge fr bimass Netwrk Rail welcmes the pprtunity t respnd t ORR s cnsultatin n a freightspecific charge fr bimass. As we have stated in previus 2013 Peridic Review submissins, particularly thse related t freight charges, we recgnise the vital part that rail freight plays in the UK s lgistics industry and we value freight peratrs as imprtant partners in the cntinued success f the railway. We recgnise the emerging imprtance f bimass t the UK energy industry and the gvernment cmmitment t supprting its use in favur f the cal which is less sustainable. In ur respnse t ORR s earlier cnsultatin n the variable usage charge and a freightspecific charge (May 2012) 1, we cnsidered that there was cnsiderable merit in nt levying any freight-specific charge n the bimass market segment and prpsed that ORR shuld revisit its plicy in the 2018 Peridic Review (which wuld als cincide with the recalculatin f the Department fr Energy and Climate Change (DECC) credit regime). We nted that unlike ther market segments that had been identified by ORR and its cnsultants as being very price inelastic, the bimass market is still in its early stages f develpment and, therefre, is subject t much greater uncertainty. We cntinue t hld this view and are particularly mindful f the emerging nature f this market. We als nte, hwever, that ORR is minded t intrduce a freight-specific charge fr bimass in Cntrl Perid 5 (CP5). We have therefre respnded t the cnsultatin n this basis, recgnising that in the event that ORR des determine such a charge, an apprach will need t be agreed fr its calculatin. We respnd t each f ORR s specific cnsultatin questins in Annex A t this letter. Assessing the impact f higher access charges fr bimass haulage 1 http://www.rail-reg.gv.uk/pr13/pdf/freight-charge-cnsultatin-may2012.pdf Page 1 f 7
We nte that as stated in the cnsultatin, ORR s legal framewrk requires it t assess the ptential f the charge t result in a material transfer f the market segment t rad haulage, and that ORR cncludes, in general, a freight-specific charge is unlikely t divert significant bimass traffic t rads. We cnsider, hwever, that there are wider implicatins f higher access charges fr bimass which merit further cnsideratin and analysis, including: the impact n future investment decisins by pwer statins t cnvert t bimass; the interactin f these investment decisins with the level f gvernment subsidy t prmte the use f bimass; and whether the intrductin f a freight-specific charge culd result in switching t ther frms f electricity generatin. These are discussed further in Annex A, specifically in ur respnse t questin 1. The need fr a pragmatic apprach fr the intrductin f a bimass freight-specific charge As nted abve, while we cnsider that there wuld be merit in nt levying any freightspecific charge n the bimass market segment in CP5, in the event that ORR des determine such a charge, a pragmatic apprach will be imprtant. Our analysis shws that bimass has 55% f the energy value f the equivalent vlume f ESI cal (which can be cnsidered as a clse substitute), due t its lwer calrific value and density. On this basis we prpse that the intrductin f any freight-specific charge fr bimass is set at 55% f the value f the capped ESI cal freight-specific charge, which wuld result in a maximum charge f 2.22 per kgtm (assuming that the ESI cal freightspecific charge is set at the maximum cap f 4.04 per kgtm). Because f the limited amunt f histric bimass data, we cnsider that this apprach is simple, pragmatic and vercmes the difficulties and subjectivities that wuld be assciated with apprtining avidable csts t this nascent market segment. We als believe that using the ESI cal rate as a base, and pr-rating it t accunt fr lwer density and calrific value, is apprpriate fr the fllwing reasns: we wuld nt expect there t be an increase in calrific demand (i.e. GB energy requirements wuld remain the same) as a result f using bimass. Therefre, this apprach shuld allw Netwrk Rail t recver an equivalent amunt f fixed cst cmpared with if cal traffic was nt substituted fr bimass; we understand that bimass flws int pwer statins will be likely t be similar t ESI cal flws; and at this early stage f market develpment, bimass data is t sparse t be rbust in determining any charge. We discuss ur prpsal in mre detail in ur respnse t questin 3 f the cnsultatin. Summary Due t the emerging nature f the bimass market and the resulting uncertainty, as discussed, abve, we have cncerns regarding ORR s minded t psitin n the intrductin f a freight-specific charge fr bimass. Hwever, in the event that ORR des Page 2 f 7
decide t intrduce such a charge, we stress the imprtance f adpting the prpsed simple and pragmatic apprach which recgnises the lwer density and calrific value f bimass, when cmpared with ESI cal. Shuld yu wish t discuss any f the pints discussed in this letter and ur respnses t the specific cnsultatin questins, please d nt hesitate t cntact me. We wuld be cntent fr yu t publish all f ur respnse as we d nt cnsider it t be cmmercially sensitive. Yurs sincerely Hannah Devesn Page 3 f 7
Annex A- Netwrk Rail respnse t ORR s fright specific charge fr bimass cnsultatin questins Q1. T what extent might higher access charges increase bimass rad transprt? We cnsider that the energy generatrs and ur freight custmers are best placed t prvide a view n whether higher access charges will lead t a switch frm rail t rad haulage f bimass, given their prximity t the market. We have, hwever, referred t the market analysis carried ut by MDST and NERA, n behalf f ORR fr its May 2012 cnsultatin n the variable usage charge and freight-specific charge 2. While MDST s phase 1 reprt ntes that the market fr bimass is in the early stages f develpment, it als ntes that bimass is in cmpetitin with ther frms f energy. In relatin t c-firing pwer statins, MDST cncludes that the respnse t changes in the variable usage charge is likely t be in line with the respnse fr ESI cal and that the demand fr c-fired bimass appears t be inelastic with a lw prpensity fr switching t rad. We als nte that in relatin t new rail-fed dedicated bimass plants, MDST cnsiders that there is mre ptential fr this market t grw with demand being likely t be much mre elastic (and indeed higher than the cut-ff fr thse cmmdities deemed nt t be able t bear a mark-up by ORR in its January 2013 cnclusins dcument). We understand that MDST s GB freight mdel (GBFM) was used t infrm its market analysis. We wuld expect the assumptins underpinning the GBFM t have been fully tested and validated with the relevant industry stakehlders. Mre generally, we cnsider that given the emerging nature f the bimass market, predicting the way in which it reacts t higher rail access charges is nt straightfrward, particularly given that, t ur knwledge, the majrity f the UK s pwer statins (with the exceptin f Drax) have nt yet cmmitted t cnverting t bimass r undertaken the required investment. We als nte that when cnsidering the impact f higher access charges fr bimass, NERA s reprt cncluded that it is difficult t predict because it depends n the extent t which gvernment subsidies are als adjusted t ensure that bimass generatin is encuraged. We als believe that there wuld be cnsiderable merit in further explring the prpensity t switch t ther frms f electricity generatin in respnse t a change in price fr the haulage f bimass by rail. While MDST s reprt appears t recgnise that bimass is in cmpetitin with ther frms f energy, the extent t which this has been cnsidered in the market analysis is unclear. We nte that as stated in its cnsultatin, ORR s legal framewrk requires it t assess the ptential f a ptential charge t result in a material transfer f the market segment t rad haulage, and that ORR cncludes, in general, a charge is unlikely t divert significant bimass traffic t rads. We cnsider, hwever, that there are wider implicatins f higher access charges fr bimass which merit further cnsideratin and analysis, such as the impact n ptential investment decisins, the interactin with gvernment subsidies t 2 http://www.rail-reg.gv.uk/pr13/pdf/freight-charge-cnsultatin-may2012.pdf Page 4 f 7
prmte the use f bimass and als whether it culd result in switching t ther frms f electricity generatin. Questin 2. Shuld a bimass freight specific charge be calculated n the basis f avidable csts as was dne fr the cmmdities n which caps have already been set? We recgnise that the advantage f calculating a freight-specific charge fr bimass n the basis f avidable csts wuld be its cnsistency with the cmmdities fr which caps have already been set. Hwever, we wuld urge cautin with this apprach, given the uncertainty arund the allcatin f csts t this emerging market segment and the lng-term traffic frecasts fr bimass. A cnsiderable amunt f ur cst mdelling is based n lng-term traffic frecasts but as bth the MDST and NERA market studies nte, the bimass market is in its infancy and we cnsider, therefre, that setting any freight-specific charge fr bimass n this basis culd risk being prne t undue levels f uncertainty. We discuss ur preferred apprach t calculating a freight-specific charge fr bimass in ur respnse t questin 3, belw. Questin 3. Shuld the charge be mdified, fr example, t reflect calrific value r exempt small statins? We nte that ORR is nt minded t calibrate a charge t calrific cntent as this wuld nt be reflective f the csts t the railway fr the haulage f bimass. Hwever, as nted in ur respnse t questin 2, given the emerging nature f the bimass market and the assciated inherent uncertainty, we cnsider that the mdelling f lng-term csts fr bimass wuld risk being speculative. In additin, we cnsider that the available market data, at this stage, is t sparse t be sufficiently rbust. We have cnsidered, therefre, an alternative apprach which takes int accunt the lwer density and calrific value f bimass cmpared with ESI cal. Our prpsed apprach uses the ESI cal freight-specific charge 3 as a base and pr-ratas the bimass freight-specific charge accrdingly. While we recgnise ORR s ratinale fr prpsing t levy a cap fr bimass at the same level f ESI cal ( 4.04 per kgtm), we disagree with this apprach and with ORR s minded t psitin nt t calibrate the charge t the calrific cntent f bimass. At a Rail Freight Grup cnference in Nvember 2012, GB Railfreight presented the fllwing data n bimass and ESI cal: Density Calrific Value ESI Cal 800 kg per metre 3 25 kj per kg Bimass 650 kg per metre 3 17 kj per kg Based n this data, ur calculatins shw that 1m 3 f ESI cal generates 20,000kJ whereas 1m 3 f bimass generates 11,050kJ 4. Therefre, 1m 3 f bimass generates 55% f the 3 As prpsed by ORR in its January 2013 dcument, at 4.04 per kgtm 4 1m 3 cal=25kj*800=20,000kj and 1m 3 bimass=17kj*650=11,050kj Page 5 f 7
energy value f the equivalent amunt f ESI cal. It shuld be nted that a key assumptin underpinning ur recmmendatin is that wagns fr the haulage f bimass and ESI cal are cnstrained by vlume capacity (as ppsed t weight). This has been validated by Netwrk Rail s freight experts. We strngly recmmend that any resulting freight-specific charge (and freight-nly line charge which is discussed in ur respnse t questin 7, belw) shuld be charged at 55% f the respective ESI cal charge at a maximum f 2.22 per kgtm. Cnsistent with ORR s and its cnsultants bservatins, this apprach has been prpsed n the basis that bimass can be cnsidered as a clse substitute fr ESI cal. We als cnsider that the cmparisn is apprpriate fr the fllwing reasns: we wuld nt expect there t be an increase in calrific demand (i.e. GB energy requirements wuld remain the same) as a result f using bimass. Therefre, this apprach shuld allw Netwrk Rail t recver an equivalent amunt f fixed cst cmpared with if cal traffic was nt substituted fr bimass; and we understand that bimass flws int pwer statins will be likely t be similar t ESI cal flws. In ur view, this apprach is simple and pragmatic. It als vercmes the difficulties and subjectivity that wuld be assciated with apprtining avidable csts t this nascent market segment. Questin 4. Shuld freight avidable csts be allcated t bimass using the same methdlgy as that used fr the ther market segments t which a freight specific charge applies? As we have nted in ur respnse t questins 2 and 3, abve, we d nt think that it is apprpriate t adpt the same methdlgy fr the allcatin f avidable csts t bimass as fr ther market segments. This is due t the emerging nature f the bimass market and the subsequent uncertainty arund the lng-term traffic frecasts. Instead, we have prpsed a pragmatic apprach t accunt fr the lwer calrific value and density f bimass cmpared with ESI cal, which is described in ur respnse t questin 3, abve. Questin 5. Is the resulting cap n the freight specific charge, f 4.04 per kgtm, fr bimass reasnable? Hw wuld such a charge affect existing bimass flws and develpment f future flws? As discussed, abve, in ur respnse t questin 3, we d nt think that it is apprpriate t set the cap fr any freight-specific charge fr bimass equal t the ESI rate fr cal. T illustrate why we cnsider this culd be inapprpriate, cnsider if all the existing ESI cal traffic were substituted by bimass. If the 4.04 per kgtm maximum cap were t be applied t bimass, because f the difference in calrific value and density f bimass, we wuld recver almst twice as much revenue frm bimass cmpared with ESI cal (assuming this was als set at the maximum cap). We cnsider that the industry will be better placed t address the impact f the freightspecific charge n current and future flws f bimass. As we have discussed in ur respnse t questin 1, hwever, we cnsider that the impact f a freight-specific charge n Page 6 f 7
future investment decisins in bimass plant and facilities and als whether it culd result in switching t ther frms f electricity generatin merits further investigatin and analysis. Questin 6, Shuld a freight specific charge fr bimass be phased in? Wuld it be apprpriate t apply the same phasing t a bimass freight specific charge as t the ESI cal freight specific charge? Yes, it is imprtant t be cnsistent and fr the industry t have certainty n this. In February 2013 we cnsulted n the phasing in f the freight-specific charge fr the relevant rail freight market segments 5. We used ORR s suggested prfile that was included in its January 2013 decisin dcument, which assumed a gradual intrductin f 0% in years ne and tw; 20% in year three; 60% in year fur; and 100% f the charge in year five f CP5. Fllwing cnsideratin f the cnsultatin respnses which we received, we expect t cnclude t ORR n the apprpriate phasing prfile in April 2013. Questin 7. Shuld bimass be subject t a freight-nly line charge, calculated n the same basis as fr ther market segments? We cnsider that if ORR cncludes that bimass is able t bear a freight-specific charge, it is imprtant t be cnsistent. Therefre, we cnsider that bimass flws shuld als be subject t a freight-nly line charge (althugh we reiterate ur psitin that due t the emerging nature f the bimass market, there wuld be cnsiderable merit in nt levying the freightspecific and freight-nly line charges n bimass traffic until the next peridic review). If a freight-nly line charge were t be intrduced fr bimass, we cnsider that its calculatin shuld be cnsistent with ur prpsal fr the freight-specific charge which we discuss in detail in ur respnse t questin 3, abve. This wuld result in the bimass freight-nly charge being set at 55% f the ESI cal freight-nly line charge. 5 http://www.netwrkrail.c.uk/wrkarea/dwnladasset.aspx?id=30064784848 Page 7 f 7