Carbon price support- a bungle too far?

As most people will know, we’ve got two instruments in the UK to price carbon into energy use and investment – the EU Emissions Trading System (EU ETS), and the UK’s, unilateral Carbon Price Support (CPS). I’ve always been a strong supporter of the EU system, and was sorry to see the difficulties it encountered last year. I’ve been a less strong supporter of a unilateral UK carbon price – but I have always thought that if there is to be one, it should be sober, stable and related properly to the European carbon price. So it was in this light that last year, in this very column, I drew attention to the astonishing rises in the indicative future levels of CPS set out by the Chancellor in Budget 2013. These I think, were partially in response to what was seen as a permanent collapse of the EU ETS. Of course the unilateral UK carbon price hike all went straight to the HMT coffers.

In last week’s Budget the Chancellor decided to remove some of his own rises on a policy that has, since its introduction in 2011, veered around like a dodgem car in a fairground. Indeed, the reality of the policy has been the exact opposite of what it was intended to do: to encourage ‘further investment in low carbon generation by providing greater support and certainty to the Carbon price’.  The CPS now looks, as it did in 2013, like a ham-fisted piece of financial opportunism in the wake of the troubles of the EU ETS. The policy would have had to be revised at a future date anyway, especially when, as is now beginning to happen, the EU ETS itself is starting to show some signs of life again. The revision actually acknowledges that possible new life by explicitly relating the ceiling to the performance of ETS over the next few years.

I’m personally not crying buckets over the freeze at an £18 ceiling in its own right. What I think is worrying, however, is the way that the Chancellor’s indecision on what the price should be has destabilised investment rather than encouraged it. Returns on Renewable Obligations and subsequently ‘Contracts for Difference’ for renewable energy projects have a built in assumption behind them about a carbon price trajectory that no longer exists. It certainly looks like funds to support new renewable projects won’t go as far as envisaged because larger payments to existing generators are now likely. Even gas power plant investment is based on higher coal prices as a result of the carbon price; now it looks as if coal will be able to run on the system far longer than had been envisaged. And gas power plant investment may be well be affected by this – unless of course the Government puts more money (our bill costs, that is) into capacity payments to persuade energy companies and other investors to build new power stations.

And that I think is the lesson of last week’s announcement. New energy investment and particularly the low carbon energy investment that we so badly need, does require a reasonably stable and long-term investment environment. The news about the terms of investment doesn’t necessarily have to be great – it just needs to be foreseeable and reliable. The Chancellor’s short-term games with the CPS may look good for this week’s news but will, I am afraid, further destabilise the investment environment. And that is what will count, long term, for the low carbon investment policy that the price support mechanism was apparently originally intended to support.

 

This article first appeared in the Environmentalist magazine

 

Latest News: green levies not to be in green levy review!

More I-made-it-up-on-the-way-in energy policy from David Cameron: this time, the commitment in last week’s PMQs to review green levies. This policy seems to have been made following a pincer movement from Tory backbenchers, who blame green levies for all those annoying windmills in their constituencies; the opposition, who are demanding action on energy prices; and some of the energy companies themselves, who claim that an exaggerated share of price rises are due to Renewable Obligation (RO), Contracts for Difference (CfDs) and all the other schemes that can be put under the green levies banner.

Of course what comes under that green-levies heading – the contents of the £112 on bills specified by the PM – is an assortment of different levies with differing effects. CfDs, RO and Feed in Tariffs (FiTs) are true green levies; they levy a payment obligation on energy companies to underwrite support for low carbon technologies. The Energy Company Obligation, meanwhile, covers several schemes supporting greater energy efficiency in homes: retrofitting of insulation in hard-to-treat properties and the reduction of bills for those in fuel poverty through insulation and efficiency measures. Warm Home discount knocks some money off fuel bills for elderly people. And the smart meter levy is slowly starting to put the roll out costs of smart meters onto customers’ bills. The Carbon Floor Price looks like a green levy but doesn’t actually save any carbon in its own right and all the revenue from it goes straight to the Treasury anyway. The EU-ETS does save carbon but is a variable amount based on trading allowances across Europe.

So the above melange is what makes up the £112 and logically therefore, now that a review has been declared, it’s what will be reviewed. And it’s fair to say that there’s not much point in having a review, unless there is a result. To swear solemnly to review all this and then declare that there is nothing to see after all so please move along now, won’t wash.  So something will presumably be reviewed out.

But what, exactly?  The process of running up a short list started, as far as I can see, almost as soon as the PM had left the chamber.  Lib Dems started rumbling about saving green levies (presumably the actual green levies) and Nick Clegg weighed in with a push in the direction these levies should be placed into general taxation (a policy suggested by some of the Big 6).

So within a week, the review has begun to look a little different.  I think DECC, recovering its composure after the surprise announcement, put out some ‘press guidance’ (not a press release, mind) to the effect that Renewable Obligation, CfDs and Feed in Tariffs would not be in the review.  I say I think, because Energy Ministers in the Commons and the Lords said opposite things on the same day, and Ed Davey refused to confirm whether the green levies would be in the review when I directly challenged him about it during the Annual Energy Statement on Thursday.

But I suppose they would be out, not least because it is difficult to see how they can easily be reviewed. Renewable Obligation and FITs are pretty much fully allocated and there might be a number of protracted legal actions if this support was suddenly taken away. In any event, RO will end in 2017 anyway and FiTs are due to be reviewed further and have already just been reviewed.  CfDs don’t exist yet, but some are in the process of being allocated for the future, most notably to that energy company building our new nuclear power station.  That might be difficult to untangle.

So that leaves non-green levies in the green levy review.  The big one, of course is the Carbon Floor Price. Not really a levy, it’s actually more a tax and as such one that goes straight from the power plants to the Treasury. Treasury in fact gets about half a billion pounds a year from it, with the trajectory of the income rising rapidly as the floor price increases. Oh and don’t forget that the Treasury has set out and planned to receive this revenue in the ‘Red Book’.  So I doubt that George would be desperately happy about the loss of several billion pounds of actual and imminent Treasury revenue if the Carbon Floor Price was reviewed out. I also doubt that he’d impressed by the prospect of the further loss of spending power that would occur if green levies were transferred into general taxation.  Of course there is also the marginal issue that EDF (yes the same company that has graciously agreed to scoop up the subsidies to build a new power station) is getting almost a billion pounds a year by selling the output from the existing, ageing nuclear fleet (which is CFP exempt) at the same price as (non CFP exempt) gas. And the loss of this money could further tip the still delicate nuclear ‘deal’ over the edge.

And then there’s the business of underwriting the smart meter roll out, which will, in the fullness of time, be levied through energy companies and charged to the bill payer. This will be about £12 billion. I’m not sure the Chancellor would willingly transfer that liability into general taxation either.

So we’re left with poor, old, non-performing, benighted ECO. It was the scheme that was going to replace warm front and other energy efficiency measures at no cost to the taxpayer and is still, we hope, going to insulate and retrofit all those energy inefficient and draughty homes across the country. And this urgently needs doing if we are to get to any sort of grips with energy efficiency and produce lower carbon emission homes in the future.

That’ll be the one then. Review sorted.  Look out for the demise or downgrading of ECO shortly, as the only prisoner that it’s actually possible to round up and make walk the plank.  And meanwhile the individual responsible for this utter shambles lives to make up another policy on the hoof as soon as he’s cornered again.

Carbon Floor Price, skunk works and committee room fourteen

And so back to Parliament to hear what her Majesty has in store for us this session. I see that the word ‘climate change’ creeps into the Most Gracious Speech, immediately above the words ‘other measures will be laid before you’. I also observe that our Energy Secretary of State has been busy during the brief recess, announcing that he and eight other energy and environment ministers from EU states have got together to produce a strong statement demanding that the commission and the European Parliament get together to sort out the EU Emissions Trading Scheme by the end of July, latest. That’ll be the revival of the proposal to relate the future price of traded allowances by ‘backloading’ large numbers of them which was ambushed in the EU Parliament just recently by among others , a large cohort of British Conservative MEPs.  So it’s good to see whose side our Government is on, then, even if some of the major coalition partners MEPs aren’t.

However, even as the ink dries on the message of hope from Ed and pals, a subtler message wafts towards us from the Committee Corridors, where the remaining clauses of the finance bill will be debated next week. One of those, clause 197, is, on the face of it, a simple clause to uprate the Carbon Floor Price. But then, looking a little further we see that the next clause introduces a whole new schedule which junks all the previous legislation on carbon floor price and replaces it with new provisions. In short, the Carbon Floor Price will, by the end of next week have been fully decoupled from what might happen to the European Emissions Trading Scheme, even as some members of the Government work to retrieve EU ETS.

To see just how much the decoupling will consist of, we need to wind back to the Treasury (yes, I’m afraid it’s them again) response to consultation paper  that came out in 2010, heralding the introduction of the first floor price this spring (2013).  And here’s the chart that showed how the floor price had been constructed – an aim of moving up to a price of £30 a tonne of CO2 by 2020, with the initial ’tax’ per tonne in the UK coming in at £4.94 – rather higher than the £1 suggested in the original consultation, but as you can see, shadowing the EU ETS upwards with an increment of about £2 per year.

carbonfloorpricegraph

All that nonsense has long been junked, though. What has happened since is that, each year the ‘indicative’ rates forward from the starting point get tweaked, and that then becomes the real price the year after. Thus in 2010, the price per tonne was £4.94 for 2012-13, £7.28 for 2013-14, and £9.80 for 2015-16.  Then in budget 2012, the second year figure morphed into £9.55, and finally, upstairs in Committee Room 14 or whatever, they will be putting the final nail in the coffin of the 2010 paper by putting into place a ‘real’ next year figure of, yes, £9.55 and then a new ‘real’ price of £12.06 per tonne for 2015-16 and a whopping ‘indicative’ £14.86 for 2016-17.

We might think a carbon floor price is a good thing, combined with EU ETS, but entirely separate from it, and predicated on a virtual zero price for the next three years out? Not so sure. Obviously, from Treasury’s point of view  it is good business raking in vast sums of money with no hypothecation on the pretence that (as the HMRC budget note tells us)  ‘the carbon floor price is designed to encourage additional investment in low carbon generation by providing greater support and certainty to the carbon price.’ All said with a straight face, of course, but we need to remember that the Carbon Floor Price, so long as EU ETS exists, does not save an ounce of CO2, since the allowances that would have been traded simply go elsewhere in Europe, probably to the longer term detriment of the system itself.

So to summarise, in case anyone’s got a bit lost by now:  Treasury (and by the way the nuclear industry for reasons set out here) get lots of free money based on a projected virtually nil price for ETS and its replacement with a tax, no carbon is saved from being emitted, and the claim can be made that this is all ’encouraging investment in low carbon power’. All quite neat, except of course, unless the EU ETS allowance trading price recovers, as Ed Davey is clearly determined that it should. I wouldn’t bet anything at all on the chances of those indicative figures coming down in the event of that happening: indeed the business up in committee corridor next week, which will probably be passed, is to ensure they don’t. Well done once again, George.