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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