How to deal with people who complain about renewable subsidies at parties

I’d like to tell you about a new system of fixed underwriting to encourage the building of new energy plants. There will be an auction and the successful bidders will get fixed sums for 15 years. This will come at a cost to consumers though – the cost of underwriting will be recovered from energy companies, who will pass on these levies to their customers. Within a short time, the scheme could add an estimated 2.2 per cent to domestic bills and an even higher amount to non-domestic bills.

“Yes, yes” you’d reply. “We know all about that. Not new. Contracts for Difference. Renewables. All this money paid out just to make them work. But didn’t David Cameron deal with all this when he reviewed all those expensive green levies?”

Well if you had replied as above, you’d be wrong, because what I’m describing are the new capacity market arrangements that we’re now all signed up to, which start at the end of this year. And of course, State Aid rules permitting, they will subsidise, not expensive renewables, but supposedly cheap gas-fired power stations, that energy companies and others are not building at the moment, or are ‘mothballing’, because they don’t make enough money from generation.

These capacity payments have been deemed necessary in order to secure promises to build new gas-fired power stations and keep them ready to supply power (but not actually to supply power – if you actually produce electricity and sell it you get a separate pot of money). This new arrangement has to be for gas-fired power because it is ‘dispatchable’ – that is you can turn it on and provide electricity when you need to do so.

But can’t biomass, or for that matter, tidal lagoon power stations, do that you might ask? Well yes they can, but they are renewable, and therefore not eligible because they get the money you thought I was talking about, although they get paid for actually producing power, and not just for hovering around ready to do so.

Still with me? Well if you are, you might be asking now how much this is all going to cost, and whether customers really are going to pay. Well they are, and it is estimated to cost a billion pounds a year from now on; hence the estimate of a 2.2 per cent increase in customers’ bills by the early 2020s – roughly what currently goes on bills as a result of green levies.

But of course, you will say, there is no doubt a cap on this new expenditure. After all, there is the Levy Control Framework that controls the amount of money that can go on paying contracts for difference and feed-in tariffs for renewables isn’t there? Well, no there isn’t any sort of control framework for the capacity mechanism actually. And that’s because it has been decided that capacity payments are not quite the same as renewable underwriting, and anyway, you’ll get your money back in the end through more available (and hence less price-volatile) supply. Not, of course, to be confused with those arguments that DECC used to put out that, in the end, energy prices would be cheaper because renewables, after the expense of construction, would benefit from free fuel whereas gas prices would keep going up. Because we all know, don’t we, that renewables are expensive and need to be controlled, whereas gas is cheap and the money is only going on plans to keep it so.

But surely, you might say, isn’t this getting wildly out of hand? Why hasn’t someone stepped in, like Mr Cameron did with those green levies and demanded that costs be cut, and we, the consumers, get better value for money? Well there was a plan to commission the building of ‘strategic reserve’ power stations that could come on stream at times of supply stress and high prices, so that prices and supply would be contained within reasonable bounds. This would have cost, it was estimated, about £350m a year, but that was rejected in 2011 in favour of the… er… much more expensive option, because it will (for reasons that are still beyond me) be better for all of us in the end. Even though, when the comparison was made, it was suggested that the more expensive option would cost customers about a third of what it is now estimated to cost.

However, that is where we now are and I don’t suppose much can be done about it, at least in the short term. The one good thing I suppose is that when anyone comes up to you in future and demands that expensive renewable subsidies are cut, you can just shake your head sagely and say ‘capacity market’ and that will be the end of the argument.

This article was first published on Business Green Plus

Big news: some landlords of some properties might have to improve them by 2018

I’ve asked a couple of questions recently about when DECC intends to end the suspense over the commitment they made in the Energy Act before last (the Energy Act 2011). This commitment requires landlords of private rented properties to bring their houses up to scratch, as far as energy efficiency is concerned, or risk not being able to let them after 2018. Now I was on the 2011 Energy Bill Committee and naively, thought that this would be fairly simple to make happen. So simple, in fact, that, along with some other colleagues in the Bill Committee, I proposed an amendment pulling the date for compliance forward to 2016.

In the end, it was 2018 that made it into the legislation. And the Act states that, some time before 2018, ‘the Secretary of State must make regulations’ setting out how landlords of properties ‘in relation to which there is an energy performance certificate (EPC)’ must get their properties fit for letting by 2018. No level of efficiency is mentioned in the Act, but the talk at the time was that the expected EPC level to be attained would be the not exactly stunning level of ‘E’ or above. But nevertheless, capturing a swathe of properties which are notoriously poorly insulated and which are statistically disproportionately inhabited by people in fuel poverty would be a real step forward.

And then…silence.

At the last DECC questions before the recess, I was very pleased to hear my colleague, Jonathan Reynolds, receive a clear commitment from the Minister, Greg Barker, that DECC will definitely be consulting on the matter this summer. Just …er…two years and eight months after the Act became law.

So that’s all fine then (I’ve noticed that I keep using this phrase as an irritating stylistic device in a number of blog entries over event months…). Well not exactly (and I’ve noticed myself adding this even more irritating rejoinder on numerous occasions. In my defence, there is a clear ‘not exactly’ in this story, so it will have to do. I promise not to do it again though).

The ‘not exactly’ here is that, when the original clause went into the Bill, the Minister guiding it through (yes it’s our old friend Greg Barker again) seemed pretty certain that it applied to all rented property and all landlords. And I am afraid to say, the committee did not then examine the issue much further. But in fact, if you read the legislation fairly carefully, it doesn’t appear to apply to the whole sector.

Basically, the Act refers to ‘the property’ of the landlord throughout the clauses dealing with the 2018 requirement. What that means, it appears, is that a landlord who is renting out a ‘property’ will have to have to produce an EPC for that ‘property’ at an ‘E’ rating or above before he can let it out after 2018.

But, as may have been spotted by many people who rent such properties, landlords very often do not let out ‘a property’; they will let out rooms in a property, perhaps at different times. Something like 14,000 such properties – so-called houses in multiple occupation – in my city, Southampton, are let out in this way. On the face of it and as matters stand, it looks like a high proportion of ‘properties’ will simply be exempt from the requirement for this reason.

I did move a ‘ten minute rule‘ Bill a while ago to try to plug this gap with some simple wording to make the intention of the Act plain but unfortunately it went the way of all such Bills. So it’s now all down to the consultation, which is what the very same Minister told me in response to one of my questions (this is where we started at) which asked about whether the regulations would seek to include HMO landlords in the Act or not.

So I guess we will have to wait and see. I understand that nice Mr. Pickles over at DCLG is not keen at all on any regulations being laid, let alone any that include HMO landlords, so I’ m sure Greg will need all his legendary courage and fortitude to ensure this happens.

Carbon price support- a bungle too far?

As most people will know, we’ve got two instruments in the UK to price carbon into energy use and investment – the EU Emissions Trading System (EU ETS), and the UK’s, unilateral Carbon Price Support (CPS). I’ve always been a strong supporter of the EU system, and was sorry to see the difficulties it encountered last year. I’ve been a less strong supporter of a unilateral UK carbon price – but I have always thought that if there is to be one, it should be sober, stable and related properly to the European carbon price. So it was in this light that last year, in this very column, I drew attention to the astonishing rises in the indicative future levels of CPS set out by the Chancellor in Budget 2013. These I think, were partially in response to what was seen as a permanent collapse of the EU ETS. Of course the unilateral UK carbon price hike all went straight to the HMT coffers.

In last week’s Budget the Chancellor decided to remove some of his own rises on a policy that has, since its introduction in 2011, veered around like a dodgem car in a fairground. Indeed, the reality of the policy has been the exact opposite of what it was intended to do: to encourage ‘further investment in low carbon generation by providing greater support and certainty to the Carbon price’.  The CPS now looks, as it did in 2013, like a ham-fisted piece of financial opportunism in the wake of the troubles of the EU ETS. The policy would have had to be revised at a future date anyway, especially when, as is now beginning to happen, the EU ETS itself is starting to show some signs of life again. The revision actually acknowledges that possible new life by explicitly relating the ceiling to the performance of ETS over the next few years.

I’m personally not crying buckets over the freeze at an £18 ceiling in its own right. What I think is worrying, however, is the way that the Chancellor’s indecision on what the price should be has destabilised investment rather than encouraged it. Returns on Renewable Obligations and subsequently ‘Contracts for Difference’ for renewable energy projects have a built in assumption behind them about a carbon price trajectory that no longer exists. It certainly looks like funds to support new renewable projects won’t go as far as envisaged because larger payments to existing generators are now likely. Even gas power plant investment is based on higher coal prices as a result of the carbon price; now it looks as if coal will be able to run on the system far longer than had been envisaged. And gas power plant investment may be well be affected by this – unless of course the Government puts more money (our bill costs, that is) into capacity payments to persuade energy companies and other investors to build new power stations.

And that I think is the lesson of last week’s announcement. New energy investment and particularly the low carbon energy investment that we so badly need, does require a reasonably stable and long-term investment environment. The news about the terms of investment doesn’t necessarily have to be great – it just needs to be foreseeable and reliable. The Chancellor’s short-term games with the CPS may look good for this week’s news but will, I am afraid, further destabilise the investment environment. And that is what will count, long term, for the low carbon investment policy that the price support mechanism was apparently originally intended to support.

 

This article first appeared in the Environmentalist magazine