That Levieson Report (levies on Demand Side Reduction finance, that is)

By way of a postscript on my blog piece on renewables and the levy control mechanism, the consultative document on Energy Demand Reduction comes tumbling out.  That there is a consultative document , and that it proposes some interesting and viable options for embedding real demand side reduction into energy policy for the future is a real plus, and we can hope that the preferred option is incorporated into the Energy Bill at the earliest possible opportunity.

Our thoughts on what might be the best option could, however be concentrated by  factors outside consideration of ….er…what is the best option.

And why might that be you ask?  Well, you need read no further than the executive summary at the beginning of the report (and here, a large cartoon warning klaxon goes off…) . Yes, it’s that levy control mechanism again. ‘Levy funding for any market-wide financial mechanisms would need to come from the Levy Control framework and support for these electricity demand reduction measures would need to be traded off against support for other measures.’

What does that all mean? To put it simply, ANY of the suite of market-based options  (premium payments, obligations etc) will have to draw their financing from the already agreed ‘Levy Cap’ pool up to 2020, which eagle eyed readers will have spotted (below) is capped at £7.6 billion in 2020, but represents, in real terms, only about £670 billion per year for ‘new entrants’.  So this already rather shrunken pool will have perhaps £100 million drained from it per year to underpin demand side reduction measures as well, which makes the already very dodgy-looking assumptions about the extent to which new renewables can be funded within the levy cap criterion seem even more fanciful.

Reliable sources tell me that DECC was unaware of, or unprepared for the move to insist on this (presumably by Treasury) when they negotiated the ‘triumph’ of the levy cap arrangements up to 2020 in return for throwing away any target for energy decarbonisation by 2030 (and we can see why that was when the ‘Dash for Gas’ strategy is announced tomorrow (Wednesday).

Anyway, back to the best option.  As a coda in the last paragraph of the summary, the scribes from below DECC, as it were, have inserted an interesting line:  they say ‘If an EDR measure is included within the capacity mechanism, it will be subject to the cost control arrangements for it when they are finalised’.

So there’s our guidance then. Go for an Energy Demand Reduction option that places it within the capacity mechanism provisions of the Energy Bill (which, coincidently, is what I suggested as a mechanism in a piece I wrote on Demand side Reduction recently  here) and then we might well avoid an outcome that underwrites demand side reduction by starving support for renewables in the process.  Might. Unless Treasury gets hold of that as well.

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2 thoughts on “That Levieson Report (levies on Demand Side Reduction finance, that is)

  1. Completely agree that a too-tight levy control framework is a problem, but two questions for your conclusion about using the capacity mechanism to pay for EDR:

    – Capacity markets only reward one benefit of demand reduction – avoided capacity. We should also reward avoided energy (ie avoided fuel consumption, especially as CCGT levelised cost is ~80% fuel cost.) Why should we go for an EDR option which systematically undervalues EDR just to avoid a badly set levy control framework?

    – Is there a risk of overfunding the capacity mechanism, and therefore gas power, if we set a capacity payment high enough to incentivise high levels of EDR?

  2. Re your paragraph on the value of the levy control mechanism: surely the new entrant figure calculation is around £670 million, rather than billion, per year? I had previously thought the only people permitted to confuse millions with billions were researchers into nuclear fusion.

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