Mixed messages, lack of transparency and a history of sudden announcements by the government has undermined investor confidence in the UK’s energy system, according to a committee of MPs.
This could mean that projects become more expensive to deliver as investors demand a greater return to compensate for the increased risk, or simply do not go ahead at all.
A gap in energy investment could undermine the UK’s ability to meet climate, energy security and affordability objectives, says the new report, which was produced by the House of Commons energy and climate change committee.
The dip in investor confidence is illustrated by the UK’s fall from 8th to 11th place in the EY Renewable Energy Country Attractiveness Index in just four months, between June and September 2015.
This is the opposite to what the Department of Energy and Climate Change (DECC) want to achieve. It has said that £100bn of investment is required in electricity generation and networks by 2020, and that the private sector has a “significant role” to play in delivering this.
DECC has said that “large-scale investment in gas and low-carbon electricity generation is vital in order to replace ageing energy infrastructure, maintain secure energy supplies and meet legally-binding environmental targets”.
The report is the result of 95 written submissions from witnesses, including major energy groups, campaigners and thinktanks. The committee said it was keen to publish the results ahead of this year’s budget, which will be announced by the chancellor George Osborne on 16 March.
How has the government undermined confidence?
The committee decided to conduct an inquiry in response to stakeholder concerns over a series of energy policy announcements made by the government throughout the summer and autumn, after the Conservative party won the UK general election last May.
For instance, the government ended subsidies for onshore windfarms a year earlier than planned and cut solar subsidies. It has also emphasised the role of gas and cancelled a £1bn competition designed to help commercialise carbon capture and storage (CCS).
Timeline: The government’s changes to energy policy
The report highlights six specific reasons why investor confidence has been damaged.
- Sudden and numerous policy announcements
Investors look for a stable and predictable policy environment, and the government has not delivered this, says the report. While they recognise that changes are a feature of democracy, every change in direction comes with a cost, says the report. If changes are made without sufficient prior warning, then investors can adapt accordingly.
Levy Control Framework: A nominal cap on the support for low-carbon energy which is paid via electricity bills. The cap has been set at £7.6bn in 2020/21. Subsidies may be allowed to temporarily exceed the cap by up to 20% as a result of external factors, such as wholesale energy price fluctuations. Above this headroom, the Department for Energy and Climate Change (DECC) must agree plans to control spending with the Treasury.
However, evidence gathered by the inquiry suggests that the government has not achieved this stable approach. Witnesses describe changes as “dramatic”, “unexpected” and “abrupt”. In the case of the decision to axe the CCS competition, industry received only an hour’s warning. Energy company E.ON says:
- Lack of transparency in the decision-making process
As part of the inquiry, witnesses criticised the government’s lack of transparency, in particular, the failure to make public the methodology and assumptions behind the Levy Control Framework spending projections, which caps government support for low-carbon energy. This has been the subject of a long-running freedom of information request by Carbon Brief, which the committee’s report cites.
If the rationale behind a decision is not clear, then confidence in the stability of the policy regime will be diminished, says the report.
- Insufficient consideration of investor impacts
The report highlights a failure of the government to consult properly with investors about the changes being made.
For instance, there was no formal consultation on the decision to close the Renewables Obligation early. The changes to the Levy Exemption Certificates was brought in without any prior engagement, even though it had a significant impact on investors in renewables. For instance, it wiped £425m off the value of Drax, a power station partly run on biomass.
This has not always been the case, however. The report says that witnesses had praised previous DECC outreach efforts under the previous government, including the Electricity Market Reform process.
- Policy inconsistency and contradictory approaches
The government has been sending, at best, mixed messages when it comes to energy policy, said witnesses who provided evidence to the inquiry. At worst, it has signalled a complete change of course.
Siemens described the “apparently contradictory messages” as “unsettling” for investors.
Examples of this include promoting decarbonisation at the lowest possible cost while halting onshore wind; giving local people a say in wind developments but not shale gas; and claiming to “let markets decide” when the energy market is heavily influenced by government.
- Lack of a long-term vision
What is the future of the government’s energy policy? The direction of travel is murky — and this is a problem, says the report. Energy projects are long-term endeavours and the process of development, acquiring permission and construction can span multiple parliamentary terms.
For the six months after the election, the government did not set out how it saw the energy system evolving over time, other than to say that the UK was on track to meet its 2020 renewable electricity commitment.
Climate and energy secretary Amber Rudd’s “reset” speech in November laid out a future free from coal by 2025, with more gas and nuclear — but the inquiry still yielded an “overwhelming call for greater long-term visibility on energy policy”, with concern remaining for what happens up to 2030 and beyond.
- A policy “cliff-edge” in 2020
After 2020, UK policy essentially falls of a cliff, witnesses told the inquiry, with no information available about the budget for the Levy Control Framework or the Carbon Price Floor. In January, Carbon Brief published a list of unanswered questions on the former.
Carbon Price Floor: The UK’s top-up carbon tax, applied to power stations and designed to supplement inadequate prices on EU markets. When implemented in 2013, the floor was set to rise gradually to £74/tCO2 in 2030. However, it was later frozen at £18/t until 2019/20.
The report contains its own list of unanswered questions about further Contract for Difference rounds — an issue about which witnesses said they would like more clarity in the pre-2020 period. Although Rudd said there would be three further auctions this Parliament, she has not set out a detailed plan. The report asks:
There is a lot of anecdotal evidence about investors losing confidence in the UK energy system, but very little hard data to back it up. This is because the projects that are likely to be hardest hit by uncertain investors are those in the early stages of the pipeline. This means that the full impact is only likely to become apparent in three to five years’ time, the report says.
The Treasury needs to take a share of the blame, according to Alasdair Cameron, a Friends of the Earth renewable energy campaigner. He said:
The report itself also offers detailed guidance on what the government must do to get its energy strategy back on track and provide reassurance to rattled investors.
This includes setting out more detail on the Contract for Different auctions and the Levy Control Framework. It should also establish a long-term vision for energy policy, in the context of achieving the fifth carbon budget, which has yet to be set.
The government should give a clear statement on policy direction by May 2016, it concludes. It says:
Capacity market reform
Separately, the government announced on Tuesday a package of reforms to the Capacity Market. These include plans to buy more electricity capacity and to start the scheme earlier, with a new auction for capacity in 2017/18.
This amounts to an effort to bring more gas online, to prevent a gap in power supplies as coal plants close.
Amber Rudd said that the move would help give confidence to investors:
According to analysis by the thinktank Sandbag, the measures will result in 4-6GW of new gas capacity being contracted in the December auction — around 8-12% of peak demand, and at a cost of around £2.5-4bn. This will probably never be fitted with CCS, it says.
Nonetheless, the group generally welcomed the announcement, saying that “[the measures] will give investor certainty to build enough gas power stations to ensure the lights stay on, even as the remaining coal power stations are phased-out by 2025”. But it also stressed that this needs to be “the final hurrah” for gas.
WWF-UK was less complimentary about the reforms. Rebecca Williams, the group’s power sector specialist, said that the announcement meant that UK energy policy continued to be “unfit for purpose”. She concludes:
Main image: Wind Turbines in Mountains, Novar Wind Farm, Ross-shire, Scotland 03 Oct 2008
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