A small rant on a large hole in our climate policy

Here’s a small rant about something in the Budget last month. It has to be a small rant because this item featured in the Budget in a very small way – the Chancellor didn’t mention it in his speech, and it necessitated ferreting through the Red Book to find out anything about it. But it is going to impact on renewables and their development in a very big way, so much so that I am really surprised that there has been so little comment or reaction. So what is the nugget deep in the Budget causing all this trouble? Well, it is the supposed announcement (long-heralded to be coming in various future Budgets) about the future direction and composition of the Levy Control Framework, on which I’ve written stuff here, here and elsewhere on several occasions.

LCF spring

LCF autumn

The waiting game…

Briefly, the Levy Control Framework is the arrangement devised originally between DECC and the Treasury (but mostly the Treasury) setting out how renewable energy support (ROCs, Feed-in-Tariffs, Contracts for Difference) would be both secured and controlled in total. The control framework for what was then DECC was a bit of a Faustian bargain with Treasury. DECC got some certainty about the funding for the deployment of wind – both onshore and offshore – solar, biomass and to a limited extent, some emerging technologies such as wave and tidal that could play a big role in the UK’s low carbon plans over the next decade.  Treasury got to control the total amounts that went in – after all, these are sums that arose from levies on customers, and bills would rise to accommodate them. David Cameron’s “cut the green crap” episode, accompanied by attacks on the funding of onshore wind and solar, was partly in response to that concern.

And the Levy Control Framework had its problems, as I’ve documented here – it was a very heavy and inefficient mechanism when things became overspent. It embodied a mechanism – at least for Contracts for Difference – that had the perverse effect of rewarding those inside it against those applying to get in when market prices went down (as they have done lately), rather than constantly up, as the framework design assumed they would. It had been set up to come to an end in 2020, and general discussions floated around about what the next iteration would be for 2021-2025. This was important to know because developers invest on an eight-year cycle at least, and need to know what there will be in terms of support when they go to financial closure on their plans. So the Government stalled for a very long time over what should happen to the framework after its first five years were over. Sums of about £7.6 billion in expenditure on renewable support were pencilled in up to 2020, and suggestions were put around (partly by the Climate Change Committee) that one might anticipate about £9.8 billion by 2025. But the budget was plainly ‘overspent’ well before that date – partly because of the unanticipated popularity and efficiency of some renewables, partly because the figures on strike price, reference price and the market were moving the wrong way by 2017, and partly because renewable underwriting comes in 15-year contracts. This means that pretty much all the renewables so far contracted are still ‘in’ the system because the tail of financing that follows their inception is still very much in play (an important effect, by the way, to which I will return shortly).

So Budget 2017 was about the last date by which something had to be decided as the cliff-edge of 2020 loomed – so what was it to be? The Government had, in any event, already borrowed some £700 million from the 2020-25 total to finance offshore wind auctions for delivery from 2021 onwards – so we knew (or thought we knew) that there had to be some kind of framework in train, albeit, one hoped, with some kind of corrections to the manifest problems of its first iteration.

It turns out in the Budget book that the Government’s solution to all this is not to have a Levy Control Framework at all from now on. This is announced in a curious section in the Red Book which says in the same paragraph that “Government will continue to support low carbon electricity as it becomes more cost competitive”, but “in order to protect consumers there will be no new carbon electricity levies until the burden of such costs are falling”, and then “on the basis of the current forecast, this means that there will be no new carbon levies until 2025”.

The detail of this apparently self-contradictory paragraph is set out in an accompanying document from Treasury rather misleadingly entitled Control for Low Carbon Levies. Difficult to see how you ‘control’ levies that don’t exist, but hey. In the document we find that there are two ‘new’ levies that are protected, but the first one is, well, an old levy: namely the remaining £557 million of the £730 million that had been set aside for less established renewables, announced in Budget 2016 and partly spent on an initial auction for offshore wind. Oh and the other ‘protected’ new levy – not surprisingly, perhaps – is that for the outrageously generous CfD for Hinkley C power station, which won’t come on stream until 2027 or thereabouts. Both levies will add considerably to the pile already committed, and will run through the period 2024-2028 (and well beyond) which makes the claim in the document and in the Red Book hard to swallow – what do they mean by “no new levies until the burden of such costs are falling”?

The ‘protected’ levies will, in themselves, make that burden rise rather than fall in the period up to 2025 and indeed well beyond, just at the time one might expect some of the obligations to fall. This is because some very early ROs will start peeling away, having exhausted the fifteen-year period over which they were awarded and hence paid out as part of the ‘burden’. The document includes a helpful, but I think quite misleading, chart showing how the call on the Levy Control Framework flattens out at around 2023 and, presumably starts to fall thereafter, which I imagine gives rise to the claim that the burden might start to fall after 2025. This is inherently unlikely, not just because the CfD part of the graph will NOT be flat after 2023 as depicted (after all, we know that the effects of the £557 million will be chugging through) and in the light of what are still-existing commitments coming in around 2021 or so (from the previous auctions on offshore wind, for example).

So the marginally soothing words in the new ‘control’ that “it does not rule out future support for any technology” are almost certainly meaningless if we are to consider the words “no new carbon levies until the burden of such costs are falling” to be definitive. That is, the ‘control’ actually tells us that there will be no new support for low carbon technologies, other than the £557 million already earmarked, until well into the latter years of the next decade. Further-from-market technologies, don’t wait around in the hope than sometime soon support will be restored – it has effectively gone for good, unless a future change of Government revisits the controls.

The small glimmer of hope that some further-from-market technologies might be holding onto is that they could get a slice of the remaining £557 million before the shutters come definitively down. After all, the last auction for wind coming on-stream for 2021 registered remarkably low strike prices, and procured 3.34GW of offshore, when the supposed original target for the whole £700 million was 4GW: so there might be space. On the other hand, central estimates of generation capacity up to 2025 appended in the low carbon levies report (p.5) set out virtually no movement in installed capacity for any of these further-from-market technologies, nor for small and large scale solar PV or onshore wind, past 2019. The one exception to this is offshore wind – which goes up vertiginously from an installed capacity in 2018-19 of 8.48GW to a massive 14.04GW by 2024 – making it likely that this projected capacity will be procured from its only possible source: the remaining £557 million, with limited room in the total for other technologies. I asked a written Parliamentary Question on what technologies would be eligible to bid in for the £557 million and received an answer that it would be: offshore wind, advanced conversion technologies, anaerobic digestion, biomass with combined heat and power, wave, tidal stream, and geothermal.

The list is revelatory not just for what it includes but for what it excludes: unless one crams all sorts of things into one slim definition, the tidal impoundment technology of the Swansea Tidal Lagoon looks to be ineligible for any auctions arising from the last remaining funding source.

Which reflections give rise to the other big hole in the proceedings: no evidence of any thought or action about alternative funding or support streams for any of this. It is arguably a fair starting point to worry about the effect of apparently ever-rising levies on customer bills and consider the alternatives, although the peculiar definitions of what is a levy in this sorry episode seems to give the green light to continuing escalation of levies on customer bills so long as they don’t involve renewables. ECO and smart meter levies and of course the continuing and mounting ‘levy’ effect of the governments quixotic quest to secure new gas-fired power stations through the Capacity Market – these are all apparently very different from the levies designed to promote future renewables. Except of course they have exactly the same effect on customers’ bills, and therefore ought, in any rational consideration of levy futures, to be included in any review. It looks as stark as this then: the entire future of all technologies that might be considered to need some form of support in the medium term is in that one small remaining pot. Indeed, if the definition of the levy burden curve really does mean that there will be no new levies well past 2025, then any new nuclear (the delayed probably Kepco-based future reactor at Moorside, for example) would also look to be caught up in the ‘no new levies’ trap.

So the grand conclusion of this rant is this: the Government has basically closed the door on pretty much all new renewable development except for its chosen vehicle of future low carbon power, offshore wind. Some will survive, of course, where they are close or on market parity, as small scale and some field solar may be. Onshore wind, if it is actually allowed to regain a foothold with some beneficial changes in the presently-oppressive planning regime, may have some future, but even the vaunted ‘subsidy-free’ CfDs possibly applied to onshore wind still have a cost element attached to them and need to be funded from somewhere.

And then finally, we should perhaps turn to the recently-published Clean Growth Strategy, supposedly containing the answers to the policy questions of how we are going to decarbonise across energy housing, transport, industrial and agricultural sectors sufficiently to meet our agreed Carbon Budget targets. The plan doesn’t work of course, since it admits in its own pages just how far short of reaching those targets present polices and the new policies contained in the plan leaves us. Yet, with the policy landscape crying out for those new policies that really will fill the gap, here is another wantonly-dug hole in existing policies that could do something about (as it’s headed in the report) ‘delivering clean smart flexible power’ covering 21% of UK emissions. We cannot continue to preach low carbon power and swear to discharge our climate obligations if we keep knocking away the wherewithal to do anything about it, and that is what the Government has just done by closing the Levy Control Framework down, whilst pretending not to.

 

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On writing notes during Budget speeches

This piece originally appeared in BusinessGreen on 27th November 2017

I’m now a veteran of many Budget Day speeches in Parliament, and one thing I’ve noticed over the years is just how many members are sitting (if you can find a seat that is), with notebook or piece of paper on knee, scribbling away as the Chancellor makes his speech.

They could of course check for themselves what the Chancellor has said later in Hansard, but I think it is more than this. It is about checking off for themselves the points the Chancellor might be making that tick their own personal lists – and indeed, I’ve seen members do exactly that, as the speech progresses.

We’ve been promised an announcement in the Budget for some time – and indeed, the government has effectively ‘borrowed’ the £700mn it announced for support of offshore wind (£200mn of which has already gone from auctions on offshore schemes deliverable in 2021-22) from the putative forward framework up to 2025.

But what would the rest of the picture look like? Clarification has become quite urgent, since it is schemes in the planning stage now that will need to know the regime for their roll out – which inevitably takes a few years to complete.

So when would my ‘tick’ arise? I sat through the jokes, the housing section, the piece on Universal Credit and even the bits in it that were supposed to be about green issues – air quality, clean air plans the possible plastic bag tax – “because we can’t keep the promise to the next generation to build an economy fit for the future unless we ensure our planet has a future”, as the Chancellor said. Ah surely, here will be my ‘tick’ any moment, I thought, because how much more important to the green economy of the future can you get than the proper roll out of renewable and low carbon energy?

But my pen stayed sheathed until the Chancellor sat down. There was no mention of what was to happen to the Levy Control Framework.

At which point of course, one does the next best thing, which is to rush round to the Vote Office, get the Budget documents and find out what is going on below the radar level of the Chancellor’s Speech. And there it was, not mentioned by the Chancellor, but clear in its simplicity: para 4.5.1 of the Budget book. There will be no replacement for the Levy Control Framework – that is “no new low carbon electricity levies until the burden of such costs is falling. On the basis of the current forecast this means that there will be no new carbon levies until 2025”.

The answer to the question about what the future Levy Control Framework looks like is “there will be no Levy Control framework because there will be no levies”.

The bald facts are accompanied by a marginally more explanatory document alongside the Budget entitled Control for Low Carbon Levies – a slight misnomer, since there will be no levies to control – which does clarify that the remaining ‘borrowed’ money for support of offshore wind will be regarded as an existing levy and therefore not covered by the new rule, as will the as yet unlevied allowance for Hinkley Point C power station coming on stream in 2026 or so. Otherwise, nothing.

So one thing is clear: there will be no more support for solar, onshore wind or indeed further-from-market technologies such as tidal and wave. It also looks as though any future application for nuclear CfDs will logically be resisted under this rule.

As for the 2025 date and the “burden of costs” caveat set out in the new non-Levy Control Framework? Well, I don’t know whether it is deliberately supposed to be obfuscatory or not, but a system that has inherent in it 15 year tails on the ROCs and CfDs already in place is not going to reduce its costs until those tails have passed through, which is a much longer timescale than 2025, so probably no such support for a number of years to come after that date.

Moreover, depending what the Chancellor means by ‘levies’ there is the possibility that plans to extend the Energy Company Obligation (funded by a levy) to tackle energy efficiency in buildings as set out in the government’s Clean Growth Strategy will not happen either.

Altogether then, a mighty axe blow at the fundamentals of the next phase of renewable deployment. It looks to me that a substantial part of the UK’s renewable industry will have to shut down, unless ways to introduce technologies wholly free of underwriting can be introduced.

All of which, I suppose, was why it wasn’t mentioned in the section in the speech about the planet and its future, because it seems this represents precisely the opposite of such a sentiment, and in a serious and long term damaging way. It will teach me to sit in debates with notebook at the ready, though, and perhaps make me just a tad more cynical about the difference between what is in a Budget, and what the chancellor says is in it when he tells us about it in Parliament.

sunet wind turbines

The Clean Growth Strategy: crispy on the outside raw in the middle

This piece originally appeared in BusinessGreen on 18th October 2017

I had grown tired of asking Ministers when the Clean Growth Strategy was going to turn up, and have had a variety of responses as to when it would. We journeyed along a year-plus road that led from the passing of the fifth carbon budget, past the date by which the plan should have emerged in response to the budget, and eventually – hooray – to last Thursday, when it finally emerged. So is it any good and does it do what it is supposed to do?

In thinking about that, we’ve got to remember that this is not any old plan devised by government to puff its position on something. It is THE plan that is supposed to follow, by law, the adoption of a climate budget – in this case the fifth carbon budget – agreed by Parliament last year. And it is also supposed to, by law, set out how the government intends to meet the terms of the budget – and in particular what additional policies over and above what is in place now they intend to adopt to keep us on track for the level of emissions reduction that the budget requires, in this case by 2032. And we know also that on present policies we are on track to miss the targets set by both the fourth and fifth carbon budgets by quite an amount of emissions.

So the answer to the first question is, yes, in many ways it is a good plan, with a range of policy directions set out in it that tick many boxes in terms of good intention on the key issues now with decarbonisation.

It endorses a strong further push on renewables over the next period, it sets out just what an ambitious programme of energy efficiency in buildings would look like to reduce and harness power use, and particularly heat so that targets can be met.

It commits to reviving the bruised programme of carbon capture and storage, which we know will be so vital in keeping energy intensive industries, and not only power stations, afloat.

 And although it is vague about exactly what is to happen in the immediate future about the EU Emissions Trading Scheme, it endorses the development of robust trading systems to shape energy use in the traded sector.

All good commitments, and to many a welcome relief from what had been seen as a series of retrograde steps on carbon reduction following the cancellation of carbon capture projects, the banning of onshore wind and the attack on solar deployment under the last Conservative-led government.

Quite how this enhanced commitment is actually going to happen is, however, a big question as far as the report is concerned. Extending the Energy Company Obligation by a few years and maintaining the status quo on funding for the Renewable Heat Incentive is, frankly, not going to get us very far with the monumental challenge of energy efficiency in buildings, and nor will the allocation of £100m to assist the development of CCS get us anywhere we need to be, especially since £1bn was taken out of CCS development just two years ago. We need much more clarity on how the support for these aspirations now turned into more solid policy will actually be executed – but that may be a question of consideration and clarification.

What can’t easily be considered and clarified in the report, though, is the bottom line of it all – and that is as the report candidly sets out (on page 41 to be precise) that, well, even with all these new policy instruments placed in the bag and assumed actually to work as well as one hopes, we’re still short of our targets for both the fourth and the fifth carbon budgets: on the fourth up to 2028 over emitting by six per cent and on the fifth by nine per cent.

Missing targets

That may not sound an enormous overhang for many but it does mean that on present policies, we will be leaving out in the atmosphere huge amounts of carbon which will have to be abated far more steeply in future budgets. And as a legal instrument, the plan has simply failed to discharge its responsibility of showing not how the government might go some way towards meeting the terms of carbon budgets, but how it will actually meet the budgets.

A report that shows that can then be judged in terms of its progress towards its goals, and corrections can be made en route where elements may fail to live up to expectations.

Here, we cannot correct our course to the budgets even if everything does swimmingly, because we remain fundamentally off target. The government really has to go away and come back, if necessary, with further policy instruments that show us if all goes well that we can keep our country on track with its climate targets for 2050.