They think it’s all over, but it isn’t!

It’s all getting a bit complicated. Energy policy which needs, one way or another, long-term vision and a reasonable level of security seems to be going short-term and getting bumpy. Not so much as a result of the opposition’s intervention on energy prices but because of increasing “differentiations” between coalition partners.

Left to their own devices, Lib Dems would probably have placed a 2030 carbon reduction target into the Energy Bill, the inclusion of which would have been an important stabilizer in energy policy for the next ten years. But instead, in the Bill’s latter stages in the House of Lords, the Lib Dems bent to the Conservatives’ and George Osborne’s view: that the Bill should only include the possibility of the Secretary of State setting a target and, in any case, not before 2016. 1 – 0 to the Conservative end of the Coalition.

The Lib Dem end has, however, been a little more robust on “green levies”. The term “green levies” refers to the package of measures supporting renewable deployment, climate change, energy efficiency programmes and anti-fuel poverty action. Rattled by the opposition’s high profile assault on the price of energy bills and their proposal to freeze prices for 20 months after 2015 (assuming they win the election), the Prime Minister suddenly announced a review of green levies at Prime Minister’s Questions two weeks ago. Cue complete chaos within the government as to what would be in or out of the newly-minted review.

Lib Dem ministers made it known that the “green” part of the so-called green levies (the Renewables Obligation, Contracts for Difference and Feed in Tariffs for small-scale renewables) would not be up for review.  Among other reasons, this was probably because most obligations of this kind are already almost fully subscribed and any retrospective “reviewing” could result in serious legal difficulties. Conservative ministers, and indeed the Prime Minister in a subsequent PMQs, then stated that all green and associated levies, such as Energy Companies Obligation (ECO), carbon floor price (CFP) and Warm Home Discount, will be included in any review.

Well finally, last week, we had a definitive picture: green levies will not be in the green levy review. 1- 1 you might say.

However this leaves some serious deep defending still to be undertaken. If, for example, the Chancellor’s own policy of just a year ago, the CFP, is still “in”, what happens if it’s reviewed? With a reviving European emissions trading system and the fact that the CFP doesn’t actually save any carbon, this policy might look like a candidate for the chop, thereby delivering a reduction in customers’ bills. But CFP creates about a billion pounds per annum for the Treasury and will raise far more over the next few years, as the already-embodied plans for price increases come into force.

And then there is ECO (also launched by the government) which requires a £4.3 billion commitment per year until 2015. This scheme will be responsible for the retrofitting and insulating of thousands of homes and therefore a long term reduction in bills. However, in the short term, the scheme is adding about £60 to an average dual-fuel bill.

The big energy companies have dangled two enticing possibilities in front of the review’s decision makers. One of these possibilities is to place ECO into general taxation, rather than it being an obligation on energy companies and – honest – they’ll knock the same amount off bills almost immediately and the government will have a result. But of course, if ECO is to be preserved, this plan would be at the cost of another billion pounds plus on the Treasury balance sheet. This would be roughly equivalent to the billion pounds of income that would be lost if the CFP was to be given the chop.  The other tempting carrot is simply to delay the implementation of ECO for eighteen months. This would result in a similar bill reduction and the transferal of the funding headache neatly and squarely to whoever is in government after 2015.

So it looks like it’s going to be ECO that’s “reviewed” but it’s unclear as to whether it will be chopped, incorporated or delayed. Whatever option is taken, that old uncertainty that has beset the Energy Bill and was evident in the hovering on carbon targets, looks set to creep in, to the obvious discomfiture of those who had thought ECO would be getting under way and were planning for its advent.

Who then will be the 2 – 1 winner? My money is on a partial incorporation and downgrading of ECO to produce some sort of short term reduction of bills. This will, of course, successfully trash both long-term certainty and the chance to save money structurally and in the longer term through the improvement of our energy-incompetent housing and building stock.

But then in football they say you sometimes have to substitute an attacker for a defender to retrieve a losing game. But you might just concede another goal if you do.

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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.

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.