Labour's Zero-Based Review

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Labour’s Zero-Based Review

Interim Report Number 15: Department for Energy and Climate Change Labour’s Zero-Based Review Interim Report No.15

DEPARTMENT FOR ENERGY AND CLIMATE CHANGE

FOREWORD

The leader of the Labour Party, Ed Miliband, and the Shadow Chancellor, Ed Balls, have made clear that departmental budgets will be cut not only in 2015-16, but each year until we have achieved our promise to balance the books. Across every part of the Department of Energy and Climate Change (DECC), we need to take a tighter approach to financial management of taxpayers’ money, and reform the framework within which the energy market operates so that it is fair for bill payers.

Under the Tory’s failing plan, energy bills have risen, and energy companies have failed to pass on falling wholesale costs. Record numbers of families with children cannot afford to heat their homes. Investors face uncertainty and indecision about the future of our energy system. And the mismanagement of taxpayers’ money, such as through the Government’s poor-value Green Deal Home Improvement Fund, and the Nuclear Decommissioning Authority’s budget, have seen tens of millions of pounds wasted.

Britain needs a government that will stand up to the energy companies to deliver fairer prices and a better deal for bill payers. A government that is serious about tackling the scandal of fuel poverty and cold homes. And a government that is putting in place the vital reforms necessary for investment in the low carbon future of our energy system, and to deliver value for money for the taxpayer.

This interim Zero-Based Review highlights just some of the ways in which we will do this. These examples have been guided by our principles to:

• Stand up for bill payers; • Tackle fuel poverty and cold homes; • Secure greater investment in energy; and • Ensure value for money across every part of the Department of Energy and Climate Change, including tackling the UK’s long-term nuclear waste efficiently and effectively.

It was a Labour Government, through the Energy Act 2008, that legislated to ensure that new nuclear power station operators have secure financing arrangements in place to meet

the full costs of decommissioning and waste management. But the UK continues to face a legacy of nuclear waste built up over many decades. Tackling this safely and effectively will remain an absolute priority under a Labour Government. However, we must ensure that the Nuclear Decommissioning Authority, in managing such an important programme of work, and at such considerable cost to the taxpayer, is able to demonstrate value for money. We highlight £38 million of potential annual savings from the Department of Energy and Climate Change, in addition to one-off savings of £10 million over the Parliament, and there could be scope for considerably more.

This represents just a sample of our work to find savings and efficiencies across Government. The next Labour Government will balance the books and deliver a surplus on the current budget and falling national debt as soon as possible in the next Parliament. There will be no additional borrowing for day-to-day spending. Labour will finish the job where this Government has failed.

Caroline Flint MP, Shadow Secretary of State for Energy and Climate Change

Chris Leslie MP, Shadow Chief Secretary to the Treasury

LABOUR’S ZERO-BASED REVIEW

The Zero-Based Review is a root and branch analysis of every pound the Government spends. It will help the next Labour Government to ruthlessly prioritise public spending and deliver service reform and improvements, rather than just salami-slicing budgets and watching services deteriorate, as has been the practice under this Government.

This process is intended not only to reveal the current Government’s costly errors and skewed priorities but will require the Labour Party to grasp opportunities to deliver reformed public services which are valued and justifiable; which provide value for money and quality services that meet the needs and demands of the public who use them; and which can both make savings and secure economic growth.

Fundamentally reviewing current Government spending is a necessary step in preparing for office. Last year Ed Balls MP, the Shadow Chancellor, announced that Labour would conduct a detailed review of every pound the Government spends, in order to help prepare ourselves for the challenges that the next administration will face. We set out the principles of our Zero-Based Review in a Phase 1 discussion document in December 2013.

Since the beginning of the year, Chris Leslie MP, Shadow Chief Secretary to the Treasury, has been examining detailed departmental expenditure as part of our first round of the Zero- Based Review, analysing every budget and exploring public service reform and redesign in detail with each Shadow team. This process has been guided by the following five principles:

• We will use public money more efficiently – and seek efficiencies in every area of government spending;

• We will use all departmental budgets to strengthen the economy – supporting growth, job creation, innovation and exports;

• We will ensure greater fairness in the impact of spending – and will prioritise spending that prevents future problems;

• At the same time as increasing efficiency, the quality and experience of public service must improve – offering the speed, simplicity and responsiveness that people now expect; and

• We will strengthen accountability and transparency across government – with clear efficiency incentives for all departments.

No department has been exempt from this process, including any areas that we may choose to protect or ring-fence, because efficiency will be necessary across all areas of spending. Our work for Phase 1 of our Zero-Based Review has been informed by the wide range of

reports which have contributed to the Labour Party’s Policy Review: the Armitt Review of long-term infrastructure planning; the Local Government Innovation Taskforce; the Stevens Review of policing and crime; and the Adonis Growth Review, to mention just a few.

Labour will continue to expose waste, mismanagement and poor decision making by David Cameron’s Government, as well as increase the scrutiny of each departmental balance sheet over the months to come. We will complete our Zero-Based Review with our first Spending Review in government, but this early work is crucial to inform the policy choices we will make. As Ed Miliband and Ed Balls have outlined, the next Labour Government will be about big reforms, not big spending.

FAILURES OF THE TORY-LED APPROACH TO ENERGY AND CLIMATE CHANGE

The current Government has repeatedly failed to stand up to the big energy companies and demand a better deal for consumers, tackle fuel poverty and cold homes, secure greater investment in energy, and ensure value for money from every part of the Department of Energy and Climate Change (DECC), including tackling the UK’s long-term nuclear waste efficiently and effectively.

Failing to stand up for bill payers

• Household energy bills are up by £300 a year compared to 2010 – and have increased twice as fast as inflation, four times faster than wages, and faster than almost any other economy in the developed world1.

• David Cameron has promised on 17 separate occasions to force the energy companies, in law, to put all consumers on the lowest tariff. Yet he has failed to take action, with three out of four families still not on their supplier’s cheapest tariff, and households being overcharged by an average £180 per year2.

• Despite wholesale gas prices falling by an estimated 20 per cent since December 2013, energy companies have passed on cuts of just 1-5 per cent to bill payers in recent months, and only on their gas bills. In Opposition, David Cameron said “you have to give the regulator the teeth to order that those reductions are made, and that is what we will do”3. Yet six years later, the Government has refused to act, and voted twice against Labour’s proposals to give the energy regulator the power to cut energy prices when wholesale costs fall4.

• It is essential that consumers get value for money from the smart meter programme, which will be paid for by bill payers. The House of Commons’ Energy and Climate Change Committee agreed that a lack of leadership by this Government has led to delays which threaten to increase the £10.9 billion costs of the programme, and delay progress against the target for all homes and businesses to have smart meters installed by 20205.

Failing to tackle fuel poverty and cold homes

• There are over one million families with children who cannot afford to heat their homes – the highest level ever recorded. Fuel poverty is projected to increase to 2.3 million

1 House of Commons library, based on figures from the Department of Energy and Climate Change. 2 Department of Energy and Climate Change, Quarterly domestic energy customer numbers, and analysis of suppliers’ tariffs. 3 David Cameron, Cameron Direct (Bedford), 8 September 2009. 4 Opposition Day debates on energy price regulation were held on 18 June 2014, and 14 January 2015. 5 House of Commons Energy and Climate Change Committee, March 2015, Smart meters: progress or delay.

households, and the fuel poverty gap – the difference between people’s bills and what they can afford – was estimated to have increased to £480 last year6.

• Under this Government, only around 60 per cent of the money available under the Energy Company Obligation (ECO) goes to households on low incomes or living in fuel poverty. The number of homes getting loft and cavity wall insulation has fallen by two- thirds since 20107.

• By February 2015, just over 5,000 households in Britain had energy measures installed under the Government’s pay-as-you-save energy efficiency scheme, the Green Deal8 – far short of the Government’s target of 10,000 by the end of 20139.

• Instead of tackling uncompetitive rates of interest on Green Deal loans, the Government has given away over £200 million to households through the Green Deal Home Improvement Fund (GDHIF), with no assessment of a household’s ability to pay, or their need for energy efficiency improvements10.

Failing to secure greater investment in energy

• It has taken this Government five years to return to the levels of asset finance investment in renewables last seen in 2009, and the UK has now fallen to a 12-year low in its attractiveness to renewable energy investors11. The lack of government support for an electricity 2030 decarbonisation target has been cited by major businesses, including Siemens, Unilever and Philips, as undermining investor confidence in the UK as a place to develop clean energy.

• Despite the Green Investment Bank’s best efforts, the Government’s failure to provide it with a clear timetable for additional powers has hampered its ability to leverage vital clean energy and energy efficiency finance.

• £1 billion is allocated for the development of carbon capture and storage technology, but only a fraction of this money has been invested, and projects have stalled because of the Government’s indecision. All five gas-fired power stations that have come online since 2010 started their planning consent and construction under the last Labour Government.

6 Department of Energy and Climate Change, 2014, Annual Fuel Poverty Statistics. 7 Green Deal, Energy Company Obligation (ECO) and insulation levels in Great Britain: quarterly report to December 2014 (Table 2.1). 8 Department of Energy and Climate Change, February 2015, Green Deal and Energy Company Obligation (ECO): monthly statistics. 9 BBC Radio 4, ‘You and Yours’, 14 March 2013: Interviewer: How many people will have signed up for the Green Deal by the end of this year? Greg Barker: […] I wouldn’t be sleeping if we didn’t have 10,000 at the end of the year. 10 https://www.gov.uk/government/news/70-million-for-home-energy-efficiency-through-the-green-deal-home- improvement-fund-release-3 11 Bloomberg New Energy Finance, and Ernst & Young Renewable energy country attractiveness index, March 2015.

Failing to tackle the UK’s long-term nuclear waste efficiently and effectively

• The Nuclear Decommissioning Authority (NDA) accounts for two-thirds of DECC’s expenditure, and provisions for the lifetime costs of its biggest nuclear site, at Sellafield, have increased by more than £15 billion since 2010-1112.

• The National Audit Office (NAO), House of Commons’ Public Accounts Committee and a report by KPMG Ltd. commissioned by the NDA, have reported that at Sellafield key targets have been missed, major projects have suffered significant delays, and management was found not to be aligned with the aim of securing value for money for the taxpayer13. This is despite the contract with a private sector consortium in charge of Sellafield being “wholly reworked” in 201114, and over £295 million paid in performance, efficiency and other fees, as well as consultancy and executive management costs, since 2010-1115.

• After the NAO reported in 2012, it took 15 months for the Government to initiate a review of the arrangements at Sellafield in March 201416. However, the Government supported the extension of the contract in 2013.

• Across its estate, the NDA plans to spend £970 million this financial year in support and overhead costs, an increase of over £230 million – almost a third – over this Parliament17. Despite the size of this budget, little information is available, and Ministers have claimed that over 95 per cent of these costs “cannot be accurately disaggregated from wider NDA expenditure”18. Administration costs for the NDA’s head office alone are around a third higher per person than other public bodies in charge of major commercial contracts and reliant on highly specialised commercial expertise.

• Some of the NDA’s activities are not closely aligned to its core decommissioning objectives. It holds a number of subsidiaries, including NDA Properties Ltd. which operates a £42 million portfolio of non-nuclear and non-operational land and 95 property holdings19. This includes farmland, residential and office buildings not in use by the NDA, some of which are miles away from the NDA’s nearest operational sites.

12 NAO, 2015, Progress on the Sellafield site: an update. 13 NAO, 2012, Managing Risk at Sellafield; House of Commons Committee of Public Accounts, 2014, NDA: Managing risk at Sellafield; House of Commons Committee of Public Accounts, 2014, Progress at Sellafield; and KPMG Ltd., 2013, The PBO model at Sellafield. 14 NAO, 2012, Managing Risk at Sellafield. 15 NAO, 2015, Progress on the Sellafield site: an update, and House of Commons written answers, February 2015. 16 NAO, 2012, Managing Risk at Sellafield and NAO, 2015, Progress on the Sellafield site: an update. 17 House of Commons written answers 220909 and 220910, 21 January 2015. 18 House of Commons written answer 224537, 25 February 2015. 19 NDA Properties Ltd. Annual Report, 2013-14 and House of Commons written answer 224208, 11 February 2015.

THE LABOUR ALTERNATIVE

Standing up for bill payers

• Britain’s energy market is not working for ordinary families and businesses. Labour will freeze bills until 2017, saving an average household £120, and will give the regulator the power to cut bills this winter20.

• During the freeze, we will reset the market to increase competition and transparency, and create a better deal for bill payers21. We will break the stranglehold of the Big Six energy companies by separating their generation and supply businesses, opening their books and ensuring they buy and sell their electricity through an open pool.

• We will establish a tough new energy watchdog to enforce our reforms and protect consumers, including new powers to revoke energy companies’ licences if they repeatedly harm the interests of consumers, and to protect off-grid households.

• We will ensure clear, fair and transparent tariffs so that people can easily compare energy prices.

• It is also essential that consumers get value for money from the smart meter programme. On coming to office, we will conduct an urgent review of the rollout of the smart meter programme, ensuring that consumers get value for money, and that decisions are taken to unblock delays and ensure much-needed progress.

Tackling fuel poverty and cold homes

• Labour will deliver long-term, permanent savings on energy bills by making our homes more energy efficient22. We will make better use of existing funding by targeting low- income households living in poorly-insulated properties who are in or most at risk of fuel poverty, allowing us to upgrade 200,000 households per year without any additional costs to consumers or taxpayers.

• We will also use this money more efficiently, by undertaking whole-house energy efficiency retrofits, which is more efficient than repeated visits to get homes up to standard, and delivery on a street-by-street basis, with local authorities and other trusted local bodies taking a leading role. This will drive local innovation and jobs, and allow local bodies to pull in funding from elsewhere to do more.

20 House of Commons library, based on figures from the Department of Energy and Climate Change. 21 Further details are set out in our Green Paper, ‘Powering Britain: One Nation Labour’s plan to reset the energy market’, 2013 (www.yourbritain.org.uk/agenda-2015/policy-review/energy-green-paper). 22 Further details are set out our Green Paper, ‘An end to cold homes: One Nation Labour’s plans for energy efficiency’, 2014 (www.yourbritain.org.uk/agenda-2015/policy-review/policy- review/an-end-to-cold-homes-labour-s-energy-efficiency-green-paper)

• For those that are able to pay, we will overhaul the Green Deal to offer interest-free loans to one million households for energy efficiency improvements in the next Parliament. To do this, we will switch spending from the Government’s wasteful £300 million Green Deal Home Improvement Fund (GDHIF), and provide a government guarantee for the Green Deal Finance Company.

Securing greater investment in energy

• Labour will put in place ambitious domestic carbon reduction targets, including in 2016 a legal target to decarbonise our electricity supply by 2030, providing long-term certainty, and supporting investment in renewables, nuclear and carbon capture and storage.

• We will set a timetable for the Green Investment bank to be given additional powers enabling it to drive new investment and accelerate the rate of private sector investment in clean energy and energy efficiency. We will also support this by enabling individuals and communities to invest in clean energy through new green bonds.

• Labour will also make investment in essential carbon capture and storage a priority. We will increase the role of the Green Investment Bank, give new powers to the North Sea regulator to explore new ways to support the technology, and will bring forward investment through Contracts for Difference23.

Tackling the UK’s long-term nuclear waste efficiently and effectively

• The Nuclear Decommissioning Authority’s (NDA’s) operating arrangements are complex, and transparency is limited. This interim Zero-Based Review highlights £38 million of potential annual savings from the Department of Energy and Climate Change, in addition to one-off savings of £10 million over the Parliament. However, there could be scope for considerably more.

• It was a Labour Government, through the Energy Act 2008, that legislated to ensure that new nuclear power station operators have secure financing arrangements in place to meet the full costs of decommissioning and waste management. But the UK continues to face a legacy of nuclear waste built up over many decades. Tackling this safely and effectively will remain an absolute priority under a Labour Government. However, we must ensure that the NDA, in managing such an important programme of work, and at such considerable cost to the taxpayer, is able to demonstrate value for money. As part of the Spending Review, we will examine the NDA’s full expenditure to explore the possibility of efficiencies beyond this level, without compromising safety. This will be informed by principles including: getting the best value from commercial contracts;

23 Further details are set out in Carbon Capture and Storage: Labour Party Position Paper, July 2014 (http://www.shadowdecc.org.uk/policy)

cutting back-office costs to ensure resources are focused on operational activities; and ensuring the NDA is focused on its core objectives.

Getting the best value from commercial contracts

• The Government has announced new management arrangements at Sellafield, which will take effect in 2016. We will ensure that rewards for failure cannot continue. Contracting with commercial organisations will continue to be necessary, including through private sector delivery partners; but we will closely scrutinise costs and incentive structures. The NDA have admitted that current transaction costs with the private sector are too high24, and the NAO has noted that the new arrangements will be similar to the delivery partner model used, for example, on the construction programme for the London 2012 Olympic and Paralympic Games and Crossrail25. Applying the cost ratios for these projects, and ending lucrative consultancy arrangements and bearing down on executive pay deals and fees could represent savings of approximately £24 million per year, or around a third of 2013-14 costs for the contract. We will invite the NAO to examine what lessons should be learned to ensure improved performance and greater transparency, and value for money for the taxpayer.

Cutting back-office costs to ensure resources are focused on operational activities

• In Government, we will closely scrutinise back-office costs across the NDA estate, and look at ways to introduce greater transparency and accountability over these figures where this does not compromise safety. Administration costs for the NDA’s head office alone are around a third higher per person than other public bodies – both large and small – in charge of major commercial contracts and reliant on highly specialised commercial expertise26. Applying these benchmarks to the NDA could save £14 million per year, separate from its operational decommissioning activities, and there could be scope for considerably more. In Government, we will examine opportunities for further savings.

Focusing on its core objective

• It is essential that the NDA maintains a laser-like focus on its core objectives. The NDA holds £42 million of non-nuclear and non-operational land and property. Despite admitting that significant amounts of this land and property is surplus, limited progress

24 Public Accounts Committee, 2015, Oral evidence: Sellafield recall, “At the highest level, we expect to be able to see improved performance in projects, and we expect to be able to see a lower overall transactional cost between ourselves and the private sector.” John Clarke, Chief Executive of the NDA. 25 NAO, 2015, Progress on the Sellafield site: an update. 26 Administration costs per member of staff. This includes Defence Equipment & Support, which manages the Ministry of Defence’s highly complex £14 billion annual procurement budget; UK Financial Investments Ltd., which manages government shareholdings in RBS and Lloyds; and Infrastructure UK, which amongst other things, supports some of the UK’s major commercial infrastructure projects. Equivalent costs were around a third lower than NDA administration costs.

has been made in selling these holdings27. Labour will conduct an urgent value for money review to speed up sales. Based on figures from the House of Commons library, over a quarter of the NDA’s listed holdings are not near operational sites28. By value, these could create one-off savings of approximately £10 million, as well as returning these to the open market and reducing NDA management costs and time.

27 NDA press release, 2013, ‘Surplus land to be sold’ and House of Commons written answer 224188, 23 February 2015: “NDA Properties Ltd has completed five land sales in the last five years, with a total net sale price of £867,000.” 28 House of Commons library, based on information from the Government Property Finder and the NDA.

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