Energy Futures Network Paper No. 13

Energy Futures Network Paper No. 13 The first 100 days of Conservative energy policy Dieter Helm Professor of Energy Policy University of Oxford 20th August 2015 Amber Rudd, the Secretary of State for Energy and Climate Change, has had a very busy start. She has ended new subsidies for onshore wind, reined back the Green Deal, removed the exemption from tax for renewables, ended the zero- carbon homes plan, removed guaranteed subsidy for biomass, borne down on solar PV subsidies, speeded up the rules on fracking planning process, and at the same time fully come in behind the Paris climate negotiations and the UK’s commitment to tackling carbon emissions. For some in the green lobby, this smacks at best of inconsistency and at worst it is disingenuous – saying one thing, and doing another. Unsurprising Renewables UK, the powerful and vocal lobby group, has screamed about the scale back of the subsidies its members have to date so effectively campaigned for. It claimed that Rudd’s commitment to tacking climate change was “like saying you want to win the Tour de France on a bike without wheels”. So what can we learn from the first 100 days of Conservative energy policy? Does it add up to a coherent framework, or is it just ad hoc and made up as the new government has been going along? The case for the initial changes 1 Energy Futures Network Paper No. 13 The Conservatives inherited a mess, partly of their own making during the Coalition. Energy policy has for almost a decade been dominated by the framework laid down by Ed Milliband in 2008, and faithfully followed through by Chris Huhne and Ed Davey – what might be called MHD. In this world, the dash-for-renewables was expected to meet all the objectives of energy policy simultaneously. It would decarbonise, increase security and make Britain a world competitive leader. This miracle would mean that customers’ bills would be lower (by 8%) by 2020 than they would have been without the MHD framework. Britain would have world beating new renewables industries, and British industry would have access to comparatively cheap electricity (compared with the expensive fossil fuels the Americans were apparently addicted to). If it all sounds fanciful today, after the collapse of coal, oil and now even gas prices, this is little consolation. The damage has already been done: customers are committed to years of levies to pay for some of the most expensive technologies. It is not as bad as in Germany, where customers must pay around €20 billion per annum, but it is more than voters seem willing to carry on underwriting. Worse still, it does not do the carbon job, and it does not enhance security. On carbon, the problem is global warming, not British warming, and hence what matters is carbon consumption, not carbon production. Ever-higher prices and taxes reduce the carbon-intensive production of Britain, but not the carbon- intensity of the shopping basket. There are much better, much cheaper ways of decarbonising much faster – as set out in The Carbon Crunch1. As to security, the current renewables have undermined the economics of gas, and choked off new investments in CCGTs – so much so, that a capacity mechanism has been required, in the face of an almost zero capacity margin. 1 Helm, D. (2015), The Carbon Crunch – Revised and Updated, London, Yale University Press. 2 Energy Futures Network Paper No. 13 The result of MHD has been more costly, and less secure energy, taking the most expensive route to decarbonisation when there are much better alternatives. In the first 100 days, some of the scaffolding of the MHD approach has been taken down. The Green Deal was overhyped by Chris Huhne – there were going to be 250,000 new jobs as the housing stock was transformed on a street-by- street basis. An army of assessors and government-approved contractors were going to facilitate this, backed up by loans tied to the house rather than the individual. It was claimed that the opportunities were enormous, since people were apparently neglecting to take pick up all the £20 notes lying in the street (the Net Present Values (NPVs) of energy efficiency measures were argued to be extremely large). All they needed was access to loans. It was largely nonsense and, as ever, the public could see through it – even if one or two of the big energy companies supported it. Very few thought the Green Deal was a good deal, and on almost any reckoning it has been a flop. Amber Rudd has rightly pulled the plug. The challenge now is to come up with something that actually works. The good news is that almost anything would be better. Next comes the withdrawal of subsidies from onshore wind. This brought howls of protest, but is merely the implementation of what was supposed to happen under MHD. Since Milliband, Huhne and Davy all knew that fossil fuel prices were going to continue going up (and all paid at least lip service to the concept of “peak oil”) and since they also knew that gas prices were going to be very volatile, the mature renewables technologies would be cost competitive by 2020 or before. Better to get out of fossil fuels now, they thought, to protect us all from what they thought would be ever more exposure to ever more expensive fossil fuels. It would be win (carbon), win (security) and win (competitiveness). Except it turned out to be lose, lose and lose. 3 Energy Futures Network Paper No. 13 The renewables lobby has been keen to emphasis the extent to which these technologies were converging on “grid parity”. The argument is that these “winning” technologies need time to mature, and that subsidies are a temporary means to achieving the big cost reductions that they keep promising. Putting aside for a moment that grid pariry ought to mean on a full cost basis, (and hence as firm power, and not only their own intermittent costs), it is reasonable to say that after a couple of decades of practice a wind turbine ought to be mature. So what is the problem with taking the subsidy away, now onshore wind has matured? The answer must be that it isn’t really competitive. A similar story can be told about solar, but it is at least more convincing. The rooftop solar companies have had the largest subsidy-driven experiment in the world, carried out on their behalf in Germany. If deployment is required to reduce costs, then Germany has done the job for us. It cannot be that the instructions are in German and not English. Costs for solar have indeed fallen substantially, and this was reflected in the recent solar FiT auctions. Solar should be able to wash its face in the market after such an enormous subsidy programme, and Amber Rudd has done the right thing here too. On the Green Investment Bank, this was Ed Davey’s colleague Vince Cable’s pet project and legacy. But nobody ever came up with a convincing reason as to why renewables and energy efficiency needed their own bank. Banks identify markets for loans, and they can specialise in particular areas, building teams and investment portfolios. We don’t have a special agricultural bank, or a pub and restaurant bank, or a car bank. What is special about this area? Could it be that the real motivation was to take extra risk, and to be ultimately supported by the taxpayer? It is no accident that at the election Labour and the Liberal Democrats wanted to pump in more public money. But if the economy is to decarbonise, then it should be mainstreamed. Britain isn’t short of banks and financial institutions. Might it instead be that it is short of NPV positive projects and that the politicians’ “winners” might not be what they seem? Government, after all, 4 Energy Futures Network Paper No. 13 has a habit of being picked by losers, especially if they have powerful lobby groups behind them. On the taxation front, renewables are no longer to be exempt from the Climate Change Levy. Part of the muddle here is that by selecting some technologies as taxable and others not, there is no incentive to bear upon the marginal cost of carbon. It is simply a further crude exemption for current selected renewables, and as such has little justification. Having extended the tax, the question left open is what should be the proper price – and mechanism for pricing – carbon. This is another piece of very unfinished business. Currently we have energy taxes (including on petrol and diesel), the EUETS, the carbon floor price and the Climate Change Levy – all developed separately in an ad hoc fashion. It is not hard to think that more could be charged for less here – less measures and less cost. That leaves the changes to planning and the planning process. Here the first 100 days has seen some rather obvious inconsistencies. When it comes to onshore wind, the government wants local communities to have a greater say. But when it comes to fracking, it wants to time limit the local input, which it sees as an obstacle to the progress it wants to see. Planning needs consistency and it needs a proper balance between national direction and local decisions. For the Coalition government – and Labour before 2010 – the direction of travel was towards centralisation. The National Infrastructure Plan would identify projects of national importance, and there were sectorial plans, which would identify such projects of national importance that local planning authorities would be effectively obliged to accept them.

Load more