Does the cap fit?

Here’s a new puzzle to mull over.  In ‘the Plan for Growth’, published alongside the budget last month, Treasury announced on an obscure page of the document (p82 – pretty obscure, I think) that it would be introducing ‘a new framework to cap the impact of levy-funded support on energy bills.’  That was about it at the time, but subsequently, a few more details of what this mechanism consists of have emerged, in the form of a treasury paper ‘control framework for DECC levy-funded spending’ (here) and a question and answer paper from the victim (i.e. DECC) (here).

In brief, the new mechanism, Treasury states  ‘will include all DECC’s existing or new policies which entail levy-funded spending’ and provides for a cap , overall for spending on these policies, even if they do not involve taxpayers money, since  they are classified as ‘public spending’.’

We know this, sort of, with the implicit cap that has been imposed on FIT expenditure, and has led among other things to the recent hasty about turn in tariff levels, but this new framework makes the overall limits of levy ‘expenditure’ quite clear. It puts a cap on all such ‘expenditure’ during the present spending review period (up to 2015) of £11.8bn. This includes funding for the Renewables Obligation, Feed in tariffs and the Warm home Discount. Well, that’s difficult but at least there’s money there for these programmes, you might say. But wait…and read a little further, because as DECC says in its Q and A leaflet, in answer to this rather pertinent question ‘in the future within the spending review period, will other energy and climate change policies be introduced within the framework? If they will, will the spending review limit stay the same?’

The answer: ‘If other DECC policies are classified ….as Tax and spend and yet are deficit neutral they will fall within the control framework’.

So what might these be, these ‘other energy and climate change policies?’ Well here’s a strong clue, in the form of a written answer from Treasury to a Parliamentary question from Huw Irranca Davies published earlier this week.  ‘These policies’ (FIT etc.) …’ says Treasury ‘operate by placing an obligation on energy companies to provide support to certain activities or groups’.

….which sounds like a very good description of the Energy Companies Obligation: it’s self evidently an obligation and it seeks to provide support for energy efficiency measures for poorer and hard-to-treat households. Rather a bulls-eye, I think.  But…. that means that for ECO to be introduced  in 2012, as DECC intends, they will need to carve a ‘control sum’ for ECO out of the £11.8 billion already in place for the three schemes. Which will go, I wonder, and will the RO banding review up shortly do the job?

It also means, incidentally, that even the most modest suggestions as to ECO’s efficacy in tackling hard to treat homes are likely to be sorely disappointed. Consumer Focus recently estimated, for example, that to tackle just over a third of non cavity wall homes requiring internal or external insulation would require an ECO investment of £7 billion.  I don’t think that’s going to happen on these arrangements, do you?

6 thoughts on “Does the cap fit?

  1. Hi
    I am not sure that CERT counted as tax/spending as defined by ONS since neither the the spending on measures the energy suppliers were obliged to install were not specified in the regulations. Instead the targets were denominated in life time tonnes of carbon. How will the ECO be specified and will the ONS consider this to be a mandated tax and spend?

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