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

 

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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.

A word on behalf of ECO – we may be sorry when it’s gone

I should think that, by the time you read this, we will be about to hear or will have heard the Chancellor’s Autumn Statement (now effectively a second budget). I have no idea what will be in it, except that it will almost certainly contain the outcome of one of the fastest “reviews” in history: the recent “green levies” review suddenly announced by the Prime Minister literally half way through Prime Ministers question time a few weeks ago. The problem with this review (which is explicitly linked to the presumption that the green levies contribute £112 to an average energy bill) is that the various amounts that appear on our bills as levies perform a variety of different tasks. Only some of them would truly fit this “green levy” description. The charges that can properly be called “green levies” are basically those that go to underwriting wind farms and solar energy and most of them are pretty fully committed to already. They were ruled out of the “review” pretty soon after it had been announced.

Ironically this leaves the Carbon Floor Price (a levy that doesn’t actually save any carbon emissions and goes straight to the Treasury) and those levies that help the elderly and fuel poor to manage their energy bills better, or those that contribute towards making our homes more energy efficient and so far less expensive to power in the long term. These are the elements of our energy bills that the Chancellor will almost certainly pronounce upon in in his statement. The question is, will he absorb them into general taxation (and give himself a fundraising headache in the process) or will they be modified or even abandoned entirely?

The word in advance of the statement was that the likely recipient of the review would be the Energy Company Obligation (ECO). This £1.3 billion-a-year obligation was placed on the energy companies to force them to tackle some of our most energy incompetent homes – such as solid wall houses – and in part to do so in favour of people who are in fuel poverty and live in such properties. It may be that ECO as a whole will be funded from general taxation but I think it is more probable that it will be cut or extended over a longer period (but with the same amount of obligation level). The present cut off point is 2015.

It is perhaps a bit of a metaphor for the whole febrile debate on energy that we should have come to this. Because without a doubt, if you want to save the most, permanently, on energy bills, ECO (or something like it) is the programme you should be investing in. The comparative figures across Europe should not surprise anyone but they still come as a bit of a shock. In the UK we have some of the continent’s cheapest energy prices but we also have significantly larger energy bills than most. And this is quite simply because, as a rule, we live in more poorly insulated, leakier homes than in the rest of Europe. These energy inefficient houses are twice as high an incidence as in Scandinavia, for example. And therefore we sit at the bottom of the European league for homes spending considerable amounts of household income on energy – we spend almost three times the level of homes in Belgium or Holland.

The effects of ECO-type schemes on bills can be startling. Many solid wall homes across the country can halve their bills through effective insulation measures. This would be a far higher and more permanent saving than other measures being canvassed. For example, reforming tariffs probably saves a few pounds and an energy price freeze would save perhaps £72 – definitely worth having but paling in weight beside the long-term effects of wholesale energy efficiency action.

Now of course energy efficiency measures affect the country asymmetrically whereas less dramatic measures spread the gain. But overall we all lose in the long term if we do not take the energy efficiency of our homes seriously and invest in their improvement. And this is why I for one will grieve if the apparently little loved and under-defended ECO scheme is sacrificed at the altar of short term energy bill expediency.

This article was first published in The Environmentalist.