No Michelin stars for the fat dud


The Financial Times ran a piece yesterday, regrettably behind a paywall, that featured the findings of Aurora Energy Research. As the FT quaintly put it, ‘the pot of money ministers have set aside to subsidise UK renewable power is likely to run out much more quickly than previously thought, according to research, placing green energy projects in jeopardy’.

Apparently, the hitherto solid looking pot may turn out to be more like a collapsing bag as uncertainties about just what the pot’s contents may buy burgeon. This is because the sums that will be expended on Contracts for Difference (CfD) will change as the price of energy changes, which the government might have exacerbated anyway by freezing the carbon price floor. DECC doesn’t seem to have taken much of this into account.

To which the correct response should be, I think ‘blimey, you don’t say’ or perhaps more colloquially something like ‘no s*** Sherlock’.

It is good that a research company has now told us that, as an instrument to facilitate and plan investment in renewables, the Levy Control Framework (LCF) is a fat dud, regardless of its efficacy as a method of stopping anyone spending more than a set amount of ‘levy money’ whether what you get for that spend is worth having or not. But a number of people (me included) have been making this point for a long time now. It is perhaps only now that Contracts for Difference are upon us, that the true fat dud-ness of the device can be uncovered.

The point is that the LCF was perhaps not such a fully fat dud when it first came out. After all, it controlled the amount of Renewable Obligation Certificates (ROCs) and feed in tariff (FiTs) payments that could be made. Since both were in fixed sum form you could fairly accurately find out what you might get for what, and importantly, how much you would have in any one year for new entrants based on what you had already committed as fixed amounts. ROCs trading allowed renewables operators additional money from their activities to invest outside the process.

But now, with the more ‘market efficient’ CfD you never quite know what the ‘cost’ of a CfD in any one year will be, since it depends on the relationship over that year between the agreed strike price and the varying ‘reference price’ it seeks to make up the difference between. If you deliberately depress the likely reference price having set a strike price in the first place by, for example, taking some of the increase in carbon floor price out of the equation, then inevitably existing providers will get more money from the ‘pot’ each year. There will then be less from the same pot each year for new entrants.

And worse, as you keep doing that year by year based on a pre-agreed static strike price against a varying reference price, then the margin for new entrants gets smaller and smaller each year.  So that the ability to plan anything new that needs a CfD at a certain time (and contracts specify ‘windows’ within which your CfDs must start, otherwise you lose them, except if you are a nuclear power station) eventually and inevitably, melts away entirely. And to be fair to DECC, who didn’t design the system in the first place, there is nothing you can do about it, once a fixed out turn figure has been set against an inherently variable cost base in the years running up to that agreed figure.

So in terms of planning for renewables to come on stream on the basis of a known underwriting, or as the FT puts it, the sum ‘set aside to subsidise UK renewable investment ‘ the LCF is a complete turkey and has been ever since CfD were invented. If, on the other hand, you don’t care whether much in the way of renewables gets built or that what is built is good value, and you just want to stop whatever it is at the point at which the money stops in 2020, then it looks a bit better.

Except, of course, that come the early 2020’s when new nuclear finally gets off the ground and decides to cash in the monumentally bloated CfD allocation achieved under the ‘investment instrument’ mechanism, the whole edifice will almost certainly come crashing down under the weight of its own contradictions. Which is why, I guess, no-one has attempted to sketch in what might be thought of as some necessary reassurance of what a levy control envelope might look like after 2020.

There, that didn’t need a research report to get straight now did it?


Why the beastly EU has cried foul on nuclear state aid

Sometimes the pieces I do for this esteemed journal are, I like to think, about subjects of reasonable significance, and sometimes, I admit, they are about obscure footnotes of dubious significance. Well here’s a piece that is both obscure AND significant. I’m referring to the very recent (and densely unreadable) 70 page ‘letter’ sent to the UK by the European Commission. This particular letter sets out the Commission’s reasons for launching a formal state aid investigation into the arrangements for underwriting (or rather subsidising) the Hinkley C nuclear power plant.  EC documents are usually quite obscure but I think this one is quite significant, because it doesn’t just set out some ‘questions to clear up’ about the structure of investment instruments, 35 year contracts for difference and credit guarantees that make up the deal on the building of Hinkley C power station (and by implication the rest of the future nuclear programme). Instead it systematically dismantles the arguments put forward by the UK government on the issue, and then asks for comments within one month on the pile of rubble that remains.

It is apparent from the document that on this one, they really have got our number. And the document doesn’t spare in levering open the contradictions in the initial UK position: how can the new reactor contribute to security of supply and widening capacity by 2020 if it is not coming on stream until 2023? How will the plant contribute to affordability when the agreed strike price is overwhelmingly likely to contribute to higher energy prices rather than lower them?  How can a deal that was not tendered against anything else reasonably be seen as competitive? How can the deal make a known contribution to decarbonisation when it was concluded before any targets for the decarbonisation of UK supply had been made? Why is all this support necessary when the department itself indicates that nuclear plants could be built without subsidy by the early 2020s anyway? And is the support required really to address ‘market failure’ or to secure a plant (or plants) possibly at the expense of other low carbon investments?

The difficulty of the UK position is, of course, that we are facing two ways on the process. For public consumption in the UK it is not a subsidy issue, because, as the coalition has always famously maintained, new nuclear plants will only be built ‘provided that they receive no public subsidy’.

However for Commission consumption the position is different. There are the UK submits, public subsidies, but these are justified, the argument goes, because the new plant performs a ‘service of general economic interest’. It is this contradictory position that the EU document skewers and then pulls to pieces.

For the time being though, it is business as usual at DECC. Here’s what Michael Fallon, energy minister had to say about the EU letter when questioned about it at Energy and Climate Change Select Committee:

‘The Commission is fully entitled to look at the detail behind the heads of terms and to set out the various questions that need to be answered and they’ve done that now publicly…It’s a perfectly normal process under the state aid rules and I’m confident that when we’ve gone through that process we will, in the end, obtain clearance.’

On the basis of the Commission’s critique, it is difficult to see the investigation will be the ‘perfectly normal’ process the minister asserts. Instead there could be the danger that, in sticking to its contradictory position, the government will not be able to adequately meet the points raised. And it’s possible that situation could seriously set back the process of commissioning and building some or all of the UK’s new nuclear fleet, because at some stage, the government will have to start again with different and more coherent arrangements for support.  Worse, by sticking with the elision of nuclear and renewable within the contract for difference and investment instrument processes, future renewable underwriting risks becoming dragged down into a protracted nuclear state aid judgement process. If it was separate, as it was originally under the Renewable Obligation, it would be clearly derogated from further state aid examination.  Something has to give, I think, and it won’t be just about ‘going through the processes’.

The final irony of all this is that by the time a nuclear plant does actually come on stream, it probably could have been built using a variety of supportive measures on planning, sitting and development assistance that do not constitute subsidy or state aid, as the Department itself sets out. Perhaps the coalition should have stuck to its original intentions.

This article was first published in Business Green. 

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.