Things are not as they seem (3): The Levy Cap, Now with Added Geek Warning

Yesterday, we finally received all the details on the Energy Bill, both inclusions and omissions.  The Bill, its explanatory notes, all the accompanying documents will, I’m sure, make for some heavy bedtime reading for some, before the second reading of the Bill, which I now understand will be on the 19th December. We’re already getting some reactions to it from a variety of quarters, but one aspect that has been curiously unremarked so far relates to the announcement from the Secretary of State last week, that very much set the scene for the publication of the Bill.  This trailed most of content headings on the basis that the Sec of State was announcing a final agreement on the clearly rather rancorous talks that had been going on over weeks between Treasury and DECC about who could do what where and when, and spend what, and, by the way, whether there should be a target for decarbonisation on the face of the Bill, or whether there should be a ‘dash for gas’ instead.

This ‘agreement’ was cast as a hard won outcome for renewables in return, essentially for removing a target from the Bill. Not a bad bargain, many commentators concluded. And here was the evidence, in the small print. The infamous’ levy cap’ limiting expenditure incurred by DECC through levies for renewables such as Renewable Obligation Certificates and FITs, would now run through to 2020. ‘The LCF budget is currently £2.35 billion for low carbon electricity in 2012/13. Under the agreement announced today low carbon electricity spending under the LCF will rise to £7.6 billion in real terms in 20/21’ and will support levies for wind, carbon capture and storage and new nuclear.  This, it was said ‘is broadly consistent with the Committee on Climate Change’s recommendation’.

Looks very good, doesn’t it? £7.6 billion to spend on renewables in 2020, an enormous rise from the present levy spend of £2.35 billion. That is how it is presented, but on a bit of examination, it doesn’t end up looking quite that way

This is because expenditure on ROCs (and subsequently, Contracts for Difference from 2017) is all ‘grandfathered’ each time a new wind farm or biomass plant starts producing energy. That is, the RO continues at approximately the level initially agreed for a set period. ROCs last twelve years; CFDs look like they will last about fifteen years for wind, and perhaps thirty years for new nuclear. So ALL plants that have come on stream since 2008 (that’s almost everything ROCable) will continue to receive levied money through 2020. And this continuing effect is included in the levy control framework. Thus, the cost of levies for renewables becomes cumulative over the period as successive new plants come on stream.

If we count this effect into the framework, something interesting happens. We can roughly calculate how much there is in the levy cap for new plant each year.  This is how it works out for the published figures up to 2015.

Year Cap for ROCs etc Cumulative payment Amount for new entrants
2011/12 £1844m
2012/13 £2352m £1844m £508m
2013/4 £2884m £2352 £532m
2014/15 £3560m £2884m £676m

Now all we know so far is that the 2015-20 cap will ‘rise’ to £7.6 billion by 20/21. It would be nice if Treasury published the full figures, but as far as I know, that hasn’t happened yet. But we can do some indicative plotting of what that crucial ‘new entrants’ money each year might be. Here’s one scenario of how we get to that £7.6 bn figure

Year Cap for ROCs/cfd/Fit Cumulative payment  Amount for new entrants
2015/16 £4240m £3560m £680m
2016/17 £4920m £4240m £680m
2017/18 £5600m £4920m £680m
2018/19 £6280m £5600m £680m
2019/20 £6960m £6280m £680m
2020/21 £7600m £6960 £640m

In other words, almost exactly the same for new entrants in each year as we will have by 2015.…which is by no means insignificant, but at the same time needs to be spread across a wider ‘new entrants’ base each year, and even possibly new nuclear, if it comes on stream before 2021.

However, this level of levy funding nowhere reaches the projections of what we will need to do by 2020, according to the Committee on Climate Change. This is what they said on Wind, for example in their 2012 progress report (p89):

  • Around 0.5 GW offshore wind capacity was added to the system in 2011, slightly exceeding our indicator for 2011. This brings total offshore capacity installed broadly on track at 1.8 GW at end-2011, after additions fell short in 2010.
  • Looking forward, there needs to be a considerable increase in build rates for both onshore (to 1.5 GW each year by 2020) and offshore (to 1.8 GW each year by 2020) to achieve the 27 GW of wind capacity by 2020 set out in our indicator framework.

I’m not sure that a ‘new entrants cap’ that supported half a gigawatt of wind coming onstream in 2011 can easily stretch to support three times that amount each year over the next eight years, let alone accommodate other renewables that may gain ROCs, or later, CfDs. It’s a bit misleading, therefore to present what is essentially a levy cap budget continuation at present levels (better than no budget, I agree…) as reaching Climate Change Committee recommendations.

It looks like DECC may have been sold a little bit of an Andrex puppy on this agreement. Exchanging a continuation of present levy funding for the removal of targets from the Bill doesn’t look like such a good deal, especially since the substantial ramping up of new entrants in the period up to 2020 will be an essential part of reaching anything like a reasonable target for decarbonisation by 2030.

Of course, my admittedly very general calculations, or my assumptions about cumulation could be wrong.  But they would need to be very wide of the mark to restore the effect that the Secretary of State so strongly advocated last week. I will be asking some Questions on this – and it would be helpful if in the meantime, the Department produced an annual breakdown of the cap up to 2020, like they have for the period up to 2015. Then we could see for sure what is going on.

Price Rises and a World Beyond Levies

Another day, another price rise…well two of them, to be exact. And as I indicated in a recent post, they both follow SSE in placing an identified proportion of the ‘reason’ for the price rise on green levies.  Phil Bentley, of British Gas put up a good defence of what the levies achieve when he spoke on the rises on the Today programme, but he nevertheless followed SSE in suggesting that some 30% of the increase was due to levies.  Now that percentage, as we know, probably relates more to British Gas and others struggling to carry out their obligations in time for the demise of CERT and CESP than reflects a long term notion of the proportion that levies make up of long term price changes (the accurate figure, is about £22 on bills in the last two years against gas supply prices of £200, by the way). Nevertheless, both announcements confirm what I said about levies at the time of the SSE announcement: they are centre stage in announcements, and won’t go away.

So it’s clearly time to start thinking about what goes next. Are we going to stick with levies as the prime means to facilitate energy efficiency and the roll out of low carbon energy supply in the long term.?  Apparently we are, since there are a whole stack of new levies, overt or hidden in the fabric of the upcoming Energy Bill.  We’ll be levied for the new Contracts for Difference, and at least indirectly for Capacity Payments. One way or another, these costs will land in the consumers lap, and of course, as far as CfDs are concerned, there will be the new element of levy needed to include the results of negotiations on the new nuclear ‘strike price’. It remains to be seen how that can easily be explained as ‘not a subsidy’ when the product appears on consumer bills, and maybe that’s a debate for another day, but you might at least cast your eyes over a very interesting piece by Simon Bullock on the real cost of strike price negotiations.

Whatever the overall price of new nuclear included in levies for the future (Ian Marchant of SSE suggests perhaps £77 per year on everyone bill if we go for EDF‘s latest top-end strike price projection), there it will sit, on our bills at a much higher rate than today, and the arguments will, inevitably, intensify. And of course, it will be accompanied by the ludicrously self-defeating mechanism of the ‘levy cap’ , introduced by Treasury to place a ceiling on what levies can raise for low carbon development, and strongly signposted as a mechanism to damp down CfDs etc. in due course. It is not that one should not seek to control bills as much as the method by which this is done: first you announce a bill for consumers, and then, by another device, you seek to dampen the effect of the bill, making the purpose of the original bill  far less certain and  foreseeable in the process. A bit like announcing a budget for resurfacing the road outside your house, and then saying that resurfacing can only go on as far as a new cap on expenditure introduced after the road rollers have got to work, so that a quarter of the road remains dug up: but no matter, the new cap wasn’t breached.

Levies also have a regressive effect in that they are placed against bills as a flat amount, regardless of energy used.  They don’t spread the load of what we should be agreeing to bear in policy terms for low carbon energy development. So we have to get out of what is increasingly becoming a difficult policy cul-de-sac.

I have suggested on a number of occasions that all these arguments point clearly towards placing that load squarely on taxation – but equally clearly, not on ‘hypothecated’ general taxation , since we would by doing that, be carving a lump out of what it is that Treasury already spends its money on. What we need (and here I have to hat-tip the Energy Bill Revolution people (here) for all their work on new green and carbon taxes) is an allocation of new  green taxes (such as carbon floor price and EU ETS auctioning) for green energy development. We would then have at last, an honest debate about the financing of green energy, and a fair way of sharing whatever the agreed level was. The principle behind doing this, I was interested and pleased to see, was adopted  by the Shadow Chancellor at the recent Labour Party Conference, when he proposed using the proceeds of 4G telecoms auctioning to fund a programme of affordable house building.

What I have  been trying to get down on paper, in addition to how this principle might work for energy efficiency and renewable power obligations, is a method of  discounting some of those incoming  new taxes from counting against public expenditure limits. The original ‘tax foregone’ element of the Landfill Levy on burying recyclable waste looks like it is worth examining in this respect: introduced, I believe, by none other than John Gummer, now Lord Deben and chair of the Climate Change Committee.  I set out some thoughts in a paper here.  You might like to take a look at it. Whatever way we go, we certainly can’t continue down the present route, of that I am sure.

When the Levy Breaks

For those over 45

Not much blogging going on over the last three weeks, I am afraid. This was primarily due to sitting on the balcony in our holiday apartment, watching the precise manoeuvres of  the plane as it flew low over the bay, flipped over the hill and expertly scooped bellyfuls of water to deposit on the hills fortunately some way away behind us.  However, modern holidays being what they are, and apartments now having free wi-fi (when it worked) there really was no final excuse for not setting hand to keyboard. I’m not sure though from what I could gather from information obtainable by such means that there were exactly momentous events taking place in the UK energy and climate change world. (I do here set aside the reports of an unprecedented melting of summer ice in the Arctic which seem to me at least substantially momentous, but not specific to the UK specifically).  Two rather random snippets emerged from the fog of far away, however: one was that SSE announced substantial energy price rises, blaming, in passing the effect of green levies on bills; and the other was that Danny Alexander (yes, the underling to George Osborne at the Treasury) is to boldly go where no Lib Dem has gone and denounce Governmente energy policies in a motion at the upcoming Lib Dem  Conference. More of that in another piece.

Of course, when the SSE price rise components are dissected, there is not the big effect on bills from green levies that were headlined initially: network costs (25% of the bill) up 9%, green levies (10 % of the bill) up 30%, and gas prices  (50% of the bill) up 14%.  So it’s gas prices, then that have essentially pushed the bill up. SSE, which is less vertically integrated than others of the ‘big six’ are, I think, primarily reflecting on what it has paid others for the energy they will supply this winter. So that’s that then. DECC seemed to think so, putting out an unusually dismissive press release almost immediately, also pointing out the preponderance of gas rises in the cost components, and being …shall we say… a little sharp about SSE’s performance on achieving their CERT and CESP obligation targets.

Well, not quite, I think, on  achieving a little distance between announcement and response. It’s true that as CERT and  CESP come to an end struggles to perform against obligation are placing costs on companies that perhaps could have been avoided if they had acted earlier. I think that’s what SSE means by its reference to ‘cost bubbles’ in its original statement on the rises. And it’s true that, even though SSE estimate that rises are 30% of 10% (i.e. not  a very large proportion of the bill)  those rises will probably continue over the longer term, particularly since the Government has welded in a whole tranche of new levies and obligations into the Draft  Energy bill appearing as an actual Bill before Parliament any day now.

So the significance of SSE’s claims , I think, lies not in their accuracy as a fair description of what is centrally driving price rises currently, but as a harbinger of what may be to come. They are, as far as I am aware, the first company to put levy costs centre stage in a bill rise announcement. Others may well follow.

Levies, then, may in the future really represent a significant component of energy bills , and at that point, their presence as a ‘flat tax’ on the possession of an energy bill, and not the use of energy by that consumer, may gain real traction as a reason for not providing the support for renewables and energy efficiency that we know will remain just essential over the coming period. So if all the low carbon development costs eggs are put in the one levy basket, there is every prospect that the basket will be dropped and the eggs smashed. (That’s enough metaphors for now, I think.)

These levies, of course became the preferred mechanism of government (both this one and the last one) because they provided a method of financing devices such as the Renewables obligation and energy efficiency schemes ‘off balance sheet’ – i.e. they were not seen as taxation and would not ’count’ as public expenditure. The present Government is has certainly been alive to the possible march of levies in taking elements of Carbon Capture and Storage (assuming it actually happens) outside a levy programme, and stumping up for the Renewable Heat Incentive from general taxation.  But they have, in addition, done exactly the wrong thing to the original logic of levies by effectively declaring them all ‘public expenditure’ after all, and bringing them into the choking embrace of the ‘levy cap’ about which I’ve posted previously (here).  So we now have levies , and more to come, which then stop working because they are capped, overthrowing the whole original intention

So why not break out of this dead end? The best route to do this, share the load of development and end the ‘flat tax’ effect, is, I think to harness future ‘green taxes’ as the underwriting instead of direct customer levies. Such taxes, such as the Carbon Floor Price and  the auctioning of  European Emissions Trading Scheme certificates, could bring in some £33.6 billion to treasury by 2022. The Energy Bill Revolution campaign has highlighted these income streams (p27) and how a far more effective programme of raising the energy efficiency of homes could be undertaken using them. They’re on the right track, but I think we need to do more, which is the subject of some thoughts I’ve been having on the matter of ECO and the Green Deal.  But more of that, perhaps later.