Things are not as they seem (3): The Levy Cap, Now with Added Geek Warning

Yesterday, we finally received all the details on the Energy Bill, both inclusions and omissions.  The Bill, its explanatory notes, all the accompanying documents will, I’m sure, make for some heavy bedtime reading for some, before the second reading of the Bill, which I now understand will be on the 19th December. We’re already getting some reactions to it from a variety of quarters, but one aspect that has been curiously unremarked so far relates to the announcement from the Secretary of State last week, that very much set the scene for the publication of the Bill.  This trailed most of content headings on the basis that the Sec of State was announcing a final agreement on the clearly rather rancorous talks that had been going on over weeks between Treasury and DECC about who could do what where and when, and spend what, and, by the way, whether there should be a target for decarbonisation on the face of the Bill, or whether there should be a ‘dash for gas’ instead.

This ‘agreement’ was cast as a hard won outcome for renewables in return, essentially for removing a target from the Bill. Not a bad bargain, many commentators concluded. And here was the evidence, in the small print. The infamous’ levy cap’ limiting expenditure incurred by DECC through levies for renewables such as Renewable Obligation Certificates and FITs, would now run through to 2020. ‘The LCF budget is currently £2.35 billion for low carbon electricity in 2012/13. Under the agreement announced today low carbon electricity spending under the LCF will rise to £7.6 billion in real terms in 20/21’ and will support levies for wind, carbon capture and storage and new nuclear.  This, it was said ‘is broadly consistent with the Committee on Climate Change’s recommendation’.

Looks very good, doesn’t it? £7.6 billion to spend on renewables in 2020, an enormous rise from the present levy spend of £2.35 billion. That is how it is presented, but on a bit of examination, it doesn’t end up looking quite that way

This is because expenditure on ROCs (and subsequently, Contracts for Difference from 2017) is all ‘grandfathered’ each time a new wind farm or biomass plant starts producing energy. That is, the RO continues at approximately the level initially agreed for a set period. ROCs last twelve years; CFDs look like they will last about fifteen years for wind, and perhaps thirty years for new nuclear. So ALL plants that have come on stream since 2008 (that’s almost everything ROCable) will continue to receive levied money through 2020. And this continuing effect is included in the levy control framework. Thus, the cost of levies for renewables becomes cumulative over the period as successive new plants come on stream.

If we count this effect into the framework, something interesting happens. We can roughly calculate how much there is in the levy cap for new plant each year.  This is how it works out for the published figures up to 2015.

Year Cap for ROCs etc Cumulative payment Amount for new entrants
2011/12 £1844m
2012/13 £2352m £1844m £508m
2013/4 £2884m £2352 £532m
2014/15 £3560m £2884m £676m

Now all we know so far is that the 2015-20 cap will ‘rise’ to £7.6 billion by 20/21. It would be nice if Treasury published the full figures, but as far as I know, that hasn’t happened yet. But we can do some indicative plotting of what that crucial ‘new entrants’ money each year might be. Here’s one scenario of how we get to that £7.6 bn figure

Year Cap for ROCs/cfd/Fit Cumulative payment  Amount for new entrants
2015/16 £4240m £3560m £680m
2016/17 £4920m £4240m £680m
2017/18 £5600m £4920m £680m
2018/19 £6280m £5600m £680m
2019/20 £6960m £6280m £680m
2020/21 £7600m £6960 £640m

In other words, almost exactly the same for new entrants in each year as we will have by 2015.…which is by no means insignificant, but at the same time needs to be spread across a wider ‘new entrants’ base each year, and even possibly new nuclear, if it comes on stream before 2021.

However, this level of levy funding nowhere reaches the projections of what we will need to do by 2020, according to the Committee on Climate Change. This is what they said on Wind, for example in their 2012 progress report (p89):

  • Around 0.5 GW offshore wind capacity was added to the system in 2011, slightly exceeding our indicator for 2011. This brings total offshore capacity installed broadly on track at 1.8 GW at end-2011, after additions fell short in 2010.
  • Looking forward, there needs to be a considerable increase in build rates for both onshore (to 1.5 GW each year by 2020) and offshore (to 1.8 GW each year by 2020) to achieve the 27 GW of wind capacity by 2020 set out in our indicator framework.

I’m not sure that a ‘new entrants cap’ that supported half a gigawatt of wind coming onstream in 2011 can easily stretch to support three times that amount each year over the next eight years, let alone accommodate other renewables that may gain ROCs, or later, CfDs. It’s a bit misleading, therefore to present what is essentially a levy cap budget continuation at present levels (better than no budget, I agree…) as reaching Climate Change Committee recommendations.

It looks like DECC may have been sold a little bit of an Andrex puppy on this agreement. Exchanging a continuation of present levy funding for the removal of targets from the Bill doesn’t look like such a good deal, especially since the substantial ramping up of new entrants in the period up to 2020 will be an essential part of reaching anything like a reasonable target for decarbonisation by 2030.

Of course, my admittedly very general calculations, or my assumptions about cumulation could be wrong.  But they would need to be very wide of the mark to restore the effect that the Secretary of State so strongly advocated last week. I will be asking some Questions on this – and it would be helpful if in the meantime, the Department produced an annual breakdown of the cap up to 2020, like they have for the period up to 2015. Then we could see for sure what is going on.

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7 thoughts on “Things are not as they seem (3): The Levy Cap, Now with Added Geek Warning

  1. “there needs to be a considerable increase in build rates to achieve the 27 GW of wind capacity by 2020.”

    True enough, but that is storing up a big problem. Following that trajectory will create an inefficient grid where installed capacity is twice peak demand in the early 2020s.

    We must start building energy storage into the system, but where’s the incentive?

    For infrastructure investment you have to procure the best technical specification. The market approach is delusional.

    ROCs have failed and CfDs will too. Production subsidies are a terrible mechanism – the CAP proved that.

  2. Alan, it concerns me that the new Chairman of the CCC does not share your doubts:-

    “The agreement on the levy control framework is very positive.”

    The dear lord otherwise has his head and his heart in the right place:-

    “Early decarbonisation of the power sector is the economically sensible path in a carbon and resource constrained world.”

    And also:- http://www.guardian.co.uk/2012/dec/02/lord-deben-thatcher-green

    “Deben said he would brook no watering down of the Climate Change Act.”

    That is likely to mean opposing the government’s plans for 20 gas-fired power stations, which could be allowed to run “unabated” until 2045. Deben said that would be “incompatible” with meeting the UK’s carbon budgets, which stipulate reductions to 2027.

    “I’m a very strong believer in the Climate Change Act. We wanted to help governments of all political parties to get over the fundamental democratic difficulty of long term policies. I think this is an absolutely essential mechanism, as we have to have long term policies,” Deben explained.

    I have been warning about the lack of foresight (energy storage) in long term policies for years. The Levy Control Framework will not build the future grid we need.

    Can’t you digest the information I have sent you and have a brain-storming knowledge transfer meeting with Lord Deben? A reduction in capital spend of £40bn and on-going operational savings measured in billions/year are not to be sniffed at.

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