Sort the Levy Control Framework out: a message from the beach

(This article originally appeared on Business Green, 20th August 2015)

This piece will no doubt hit BusinessGreen readers as they prepare for, are on (if you read BusinessGreen whilst on holiday), or sadly, have just returned from the great annual British fortnight of doing not very much by the sea. Just to enter into the spirit of things, I can confirm that this is being penned as I gaze out across the pine trees to the azure strip of sun dappled ocean set against smokey grey hills beyond, etc, etc.

But what I want to think about briefly is what is to happen when we all return, and specifically, whether this autumn will see what is increasingly a success story for Britain, the deployment of renewable energy of all shapes and sizes halted in its tracks, or whether it can continue on a path to ensure that climate change targets are met and that clean energy continues to supply larger portions of the UK’s energy needs over the next decade.

What will happen in the autumn will, I am becoming increasing convinced, make that difference, and the signs right now are that on present trajectories, deployment will come to a halt. Or rather it will appear to spin out for a while as the remainder of the momentum that has built up in the system passes through, but essentially it will be moribund for the longer term future, and will take considerable new effort and new policy initiative to revive. All of which could be very bad news for longer term targets, and certainly for the discharge of whatever obligations the UK will be taking upon itself as part of the – hopefully successful – Paris climate change talks in December.

The big deal here boils down to one central question: does the government want to fix the problems now being encountered by the operation of the Levy Control Framework (LCF) which governs much of renewable deployment, or does it intend to see it just fade away and take the renewables industry with it? The obvious occasion for the fixing to take place will be the spending review that is due to be presented to the nation by the chancellor at the end of November. The indications of the substance of the review are, (announced by the chancellor in July) that it will be a non-spending review – as heralded by his announced request that all ‘unprotected’ government departments, including DECC, should prepare plans to cut either 25 or 40 per cent of current expenditure. But the LCF rather stands outside these considerations, or at least should.

It was, after all, introduced to a barely noticing world in 2011 as a mechanism to control essentially variable ‘expenditure’ on renewables by DECC (the amount awarded to a renewable generator in support does not vary but the amount ‘paid out’ through the contract for difference mechanism does, depending on the general price of energy) by stating a fixed sum that expenditure should amount to by 2015 and then by 2020.

The renewables industry generally welcomed, or did not kick up much of a fuss about the framework at the time because, well, it seemed like a lot of money, and 2020 was a long way away. The very success of renewable deployment over the intervening period and the expense of underwriting the cumulative allocation of CfDs each year now means that on present reckoning, the LCF, as I have long been pointing out, will be bust and essentially non-operational for any new renewable deployment between now and 2020. This means no new support for anything now seeking to deploy unless that deployment is already covered by an early investment agreement or has squeezed in through the recent auction of CfDs the operation of which is now in doubt for the foreseeable future.

But it all seems a bit odd talking about DECC overshooting its targets for the LCF and there being no new expenditure left in the budget when the LCF is not really about expenditure at all. No budgeted money changes hands between the exchequer and DECC, and neither does any change hands between DECC and renewable generators. You will no-where find the LCF accounted for in DECC departmental expenditure, or in Treasury accounts for that matter: it lies outside both, since it relates to the allocation of the theoretical effects of levies which go to support the underwriting of renewable expenditure, and are only controlled by Treasury because the expenditure on consumers bills which would result from such levies is classified by the Office for National Statistics as ‘putative tax and spend’.

In short, it is a very strange instrument indeed: and the Chancellor’s decision on whether to let renewables twist in the wind by maintaining the theoretical ‘cap’ where it is, or ease their development by altering these parameters, is not about ‘spending’ but about the notional, and eventual effect on bills of the short and medium term cost of renewable deployment.

The Chancellor could, therefore, without an effect on his overall spending plans, change the way the LCF functions and create the room within it to ‘fund’ new deployment. Or he could, with at most a notional effect on bills (offset by energy price differences anyway) raise the ceiling on the cap and create headroom for new projects immediately.

I will be trying to persuade the Chancellor over the next two months to take one of these two routes in the autumn: because I know that the do-nothing option, is not in reality that. It is a do something route, that something being the smothering of the next stage of vital renewable energy deployment and, ironically, the inflicting of longer term fatal damage to the ability of the clean energy industry to use the support to, eventually, stand on its own feet.

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