Renewable energy targets: how Goldilocks got eaten by a bear



The bear

The bear

So how are we doing with that all important target of 15% of final energy use to be provided by renewables by 2020? It is a target agreed with our EU partners and I suppose some will say it doesn’t matter if we aren’t going to be in the EU come 2020. But even then there is the small issue of keeping the UK’s energy carbon output on a trajectory that makes a low carbon energy landscape possible by 2030, and we are of course in the EU right now. So for legal reasons and for reasons of keeping the planet in one piece answering the above question does currently matter.

Last Spring the misleadingly titled Renewable Energy Foundation (REF) (which, we should note, does not seem to be in favour of many renewables, and most notably onshore wind) published and widely trailed a claim that Britain was already well on the way to meeting its EU 2020 renewables target. The organisation therefore concluded that all outstanding onshore wind applications were, in reality, surplus to requirements.

Ed Davey, responding to a letter from Mary Creagh MP about those claims, advised that there isn’t actually a surplus hanging around. He pointed out that REF had assumed that everything in the planning pipeline gets built (he suggested that for example 50% of proposed onshore wind gets planning permission, and of that, 70% actually gets completed). However, despite the above, he did imply that the existence of the ‘pipeline’ means that ‘we remain on course to meet our…2020 renewable energy targets cost effectively’.

So who’s right on this? Remember that the 2020 target is an overall agreed EU target for 15% of final energy use to be met by renewables – which implies a far higher proportion of our electricity to be made up of renewables than that in order to meet the overall goal. It is generally accepted that about 35 – 40 % of our electricity by then should be from renewable sources, which, so the REF tells us, equates to about 33 gigawatts of installed power at average renewable capacity values.

Sorry, I was asking who was right…Well clearly Ed Davey is right to pull REF up on its assumptions about how much ‘in the pipeline’ will actually get built. But he is, I am afraid, now increasingly finding himself guilty of exactly the same assumption: that is that are enough renewable projects ‘in the pipeline’ to come good regardless of the various vicissitudes that the technologies are going through.

Ed’s most recent go at projecting the mix of technologies which would generate the installed capacity we need to deliver the 2020 target line was contained in the December 2013 Electricity Market Delivery Plan, which he helpfully pointed Mary Creagh to in his letter. This report (p.40) lists the range of projected capacity of the various renewables that the Department expects to fill the bill – overall from a minimum of 27.2 installed GW to 40 GW at the most optimistic. And there it sits, in the middle, the ‘goldilocks’ figure of about 33.3 GW. Thank god for ‘the pipeline’.

Well, except that is, if you turn to what DECC told the National Audit Office (NAO) this spring about what actually IS in that pipeline, and what its status is. You can check it out here on p.31 of their report ‘Early Contracts for Renewable Electricity’. At first sight this chart looks like case proven for the Renewable Energy Foundation. No less than 44GW of capacity in onshore wind, offshore wind and biomass listed, and that’s without the 4GW or so of large solar already installed or on its way. But the NAO have helpfully divided the overall figures into what is operational, being built, consented to and what awaits planning permission, and of all the plants in development, which have or don’t have an early investment contract agreed.

If we apply this helpful division into the events of the past few months, then the reality starts to look substantially less rosy.

The government has essentially stopped field solar installations because of Levy Control Framework (LCF) worries. So it is likely that the installed total of large solar installations by 2020 will stay around where it is.

But there’s still onshore, offshore and biomass in the pipeline? Well, Mr Pickles has decided to can onshore wind applications by calling them all in and refusing them, so it is probable that consented onshore will get built at about the rate Ed Davey suggests, but not otherwise.

But what about biomass and offshore? For this we have to turn to the LCF, also inter alia, the subject of the NAO’s report. DECC’s latest figures on the LCF, set out in the Annual Energy Statement in September show that the LCF is essentially bust. Projects that do not already have an investment contract (five offshore wind farms and three biomass plants…oh and of course a whacking great big nuclear power plant which doesn’t count as renewable even though it has scooped up shedloads of CfDs) are very unlikely to get anything now before 2020. Even if one is very generous with assumptions about the knock on the impact of the cumulative total of CfDs from other years, in the figures forward to 2020, it is hard to see anything more than one medium-sized, offshore windfarm getting a CfD, and even then, not before about 2018, by which time it will be too late for 2020. And of course the same goes for biomass. So on these figures, probably best to discount anything that does not now have the prospect of getting a CfD before 2020. Unless you believe that suddenly un-CfD supported projects will rise up and get built – highly unlikely.

And all this means that (and you’ll have to trust my maths on this, but I’ll happily send you a working sheet of the calculations), taking everything into account, we miss the magic figure of installed capacity by about 3GW or 10%. Granted, a good effort compared to where we were a little while ago but way short of where we need to be, way short of where Ed Davey seems to believe, despite the best efforts of his own government, that we will be, and miles off REF’s rambling.

Unless, of course, the LCF is recast to iron out its manifest faults, and/or Mr Pickles is taken away in a van and held somewhere until it’s all over, or of course we leave the EU in 2017. After that we won’t need to worry about the renewables target and the implications of not meeting it, but we might worry that we didn’t have much of an energy economy left, renewable or otherwise.



Why ECO should become ECO

By way of a cheery goodbye to 2013, Damian Carrington reported in the Guardian on December 30th  that (according to a compilation of Parliamentary answers and latest DECC official statistics) loft insulation retrofits plummeted by 93% between 2012 and 2013 (1.61 million to just 110,000) and cavity wall insulation measures dropped 76% over the same period (640,000 to 125,000 in 2013). What he could also have reported using the same statistics was that solid wall insulation – that category of ‘hard to treat’ properties regarded by the Climate Change Committee as essential to treat at a rate of over 3.5m solid walls by 2030 – also fell from 82,000 in 2012 to 16,461 in 2013. Which also means a drop of almost 80%.

These figures, of course, mark the passing of the CERT, CEST and Warm Front programmes and their replacement by Green Deal and the three strands of ECO. And it is ECO which has, Carrington notes , done all the heavy lifting to arrive at the pitiful total that was reached, accounting for no less that 98% of all installed measures in 2013. This latter point, I think, puts the lid on the suggestion that the poor figures can be explained away by saying that this is just a hiatus whilst the new schemes unfold. The almost invisible performance of Green Deal and the pulling apart of ECO will most likely mean that ECO lifts some of the Green Deal dead-weight, but at the expense of other harder to achieve measures such as solid wall insulation. So we can therefore expect the modest solid wall insulation figures to be as bad next year or indeed even worse. In short, it is not a hiatus. It is a collapse, with no relief in sight.

And it is serious, very serious indeed, because we know that energy efficiency in homes is the only really effective way to combat fuel poverty in the long term. And we know that for any serious climate change emission targets to bite we need many more UK homes, commercial and industrial buildings being made more energy efficient (as the CCC provides for in its carbon budgets). Each of these goals will only be achieved by the methodical implementation of measures in a reliable, extensive, year in and year out fashion until we get there. The grandmother’s footsteps-style repositioning that DECC has undertaken in the wake of the ‘green levies’ fiasco of two months ago will perhaps turn a collapse into a mere rout, but that is all.

So I think it is time for a fundamental rethink of how we get ourselves anywhere near back on track, because we know we will have to do so sooner or later.

I don’t think we need to look very far to see what might be done, and it isn’t just all about money, although the presence of funds to make it happen is very important. Even if the plans of the admirable Energy Bill Revolution people were to be adopted, with their proposed root and branch energy efficiency programme which uses the proceeds of future green taxes to vault English and Welsh homes up through the energy rating bands, we would still need to look at how such a programme might be delivered. And here I think is where much of the effort, even when it was better and publicly funded, has come unstuck.

A common thread through CESP and ECO ( that is until the December ECO announcement stopped many fledgling collaborations in their tracks) has been that where programmes have worked or started to do so, they were through area partnerships between energy companies and local authorities. Along with social landlords it is because of these unsung heroes that much of the progress to date has been made. The final Ofgem CESP report records for example:

‘Almost all CESP measures were delivered through partnerships with social housing providers (SHPs) or by direct promotion to private households (e.g. privately owned homes within social housing developments). Activity carried out in partnership with SHPs was the most popular delivery route but many schemes covered both delivery routes, often including the private householders that were located within predominantly social housing areas.’

And what would have happened, in all probability, if the ECO target had remained fixed to 2015, was that obligated energy companies would have sought to offset known and reliable chunks of their obligations onto local authority partnerships as a priority. For instance, like the one that was about to be signed between three partners MITIE, SSE and Southampton City Council for the cladding and uprating of thousands of homes across the city until clumsy Dave tore the rules up.

And we know, looking back somewhat, that local authorities were highly successful in delivering uprating programmes including insulation in the General Improvement Areas and Housing Action areas of the 70s and 80s.

It always has looked a little strange, in the light of all this evidence, that a complex layer of measures has been in place, obligating energy companies to seek partners. Or in the case of CERT and now for ECO actually to seek out ‘vulnerable’ households and get their properties treated, when it would all have been far simpler, more straightforward and effective to do it at local authority level.

I appreciate that placing obligations into the hands of those that had them was a way of avoiding the cost of all of it falling upon the public accounts (although quite why we can’t just follow the rules adopted by pretty much the rest of Europe for public expenditure purposes is a mystery). I also understand that Green Deal, in particular, has been informed by an imaginative but ultimately far too byzantine experiment in capturing the forward value of energy savings into a market led programme. But let’s face it: both approaches look like they’ve failed.

Even so, we could adapt elements of the logic of both approaches into something that may work over the next period.  I think that the relationship between partners should simply be turned around: Energy Company Obligation should become Every Community Obligation.  Local authorities should have the obligation for reaching targets for treated properties in their areas, and once programmes have been put into place, energy companies should be obliged to compete to secure the right to fund an agreed part of them. Rewards similar to some of the principles of the New Homes Bonus should come the way of local authorities reaching their targets. This could be done through area schemes such as ‘Efficiency Improvement Areas’ similar to GIAs. Energy companies would have to chase the musical chairs of schemes to fund in order to be signed off for their allocated funding obligation and to ‘buy out’ a higher fine if they fail.

Probably, most of the funds local authorities would need to carry out their obligation could be obtained in this way and fines for energy companies could be recycled. It would be far simpler and I think far more efficient that the present system. And you never know we might just cladding by cladding, cavity wall by cavity wall, get back onto the road we know we will have to travel down.

Scary Ed or scary George? Investors choose…..

So who’s scaring off investors more? This is one to puzzle over, especially with the emergence on Monday of a letter from a number of global ‘investors in the energy sector’ (covered in the Independent here) that George Osborne’s removal of a decarbonisation target from the Energy Bill  risked the ‘£110bn overhaul of Britain’s energy network’.

Last week, of course we had a similar claim from Centrica and others in some of the national press that Ed Miliband’s proposals for a freeze on energy bills from 2015-17 would lead to exactly the same risk to that ‘£110 billion overhaul’.

I suppose, just to put the cat among the pigeons, we might look at some of the evidence behind these claims. Incidentally the new paradigm for what it will cost for this ‘overhaul’ seems to be more modest in ambition than it was just two years ago, when we were supposedly in for £200 billion (here’s what I said about that at the time).  This figure is now expected to be about £100 billion by the early 2020s ; still a very large number I would agree. All these figures, though, do seem to be derived from various scenarios from Ofgems ‘Project Discovery Energy Investment Scenarios’ – last revised in 2010. These ‘scenarios’ veered between a pot of £200 billion for its ‘green transition’ picture (which envisages that ‘there is a rapid economic recovery and significant new investment globally’) and £95 billion for the ‘slow growth’ scenario (which posits that the ‘impact of recession and credit crisis continues…generation build dominated by CCGT energy efficiency measures have limited impact..’).

So I guess the new agreed investment figure is towards the ‘slow growth’ end of the scenarios. But even so, it is made up of a number of components such as interconnectors, offshore wind, smart meters, onshore/offshore transmission, grid-strengthening and so on, which have little to do with what many consider to be traditional ‘energy investment’. In fact only about a quarter of total investment will come from what we think of traditionally as old-style, centralised power plants. The other three quarters will come from those less-familiar components, with over half the total coming from renewable generation itself.

And the significant feature of these investment figures is that the Big Six utilities will not feature heavily in the investment profile for these categories. Indeed if we look at the balance sheets of the Big Six, four of the six have net debts of more than two thirds of their market capitalisation. This means that they are unlikely over the next period to lever themselves up still further in order to splash the cash for investment in any of the sectors at all. Most of the £110 billion will have to come from elsewhere and will indeed do so.

And, by the way, if there is to be investment coming from the profits ofthe Big Six, it will hardly be damaged by what may or may not happen to their retail arms, which, as we know, Labour want to separate from their wholesale businesses.  The aggregate profit margin made by the Big Six on generation in 2011, as Ofgem records, was 24.4%, whereas for supply it was 3.1%. Whilst of course there is a connection between generation proceeds and supply prices, these figures hardly suggest a drying up of profits on generation. Separate retail companies at that point, with lower returns, would probably value and work best on some form of regulated price and return regime (but that’s another point entirely).

So where does that get us to? Well it looks like most investment will have to come from non-Big Six companies not primarily affected by a retail energy price freeze, but far more affected by larger instability and long term uncertainty. Long term uncertainty in an investment market which is seeking to finance the equipment and transmission that will need to sit alongside the different form of energy economy that we are all supposedly signed up to. And they seem to be the ones signing letters to the Chancellor right now.