Sustained effort to reduce emissions and prepare for the impacts of climate change over the course of many Parliaments is required by the UK Climate Change Act. But each government will still set its own policy agenda.
During this Parliament most policies and funding targeted to reduce emissions are due to end. Significant new policies are therefore required to ensure that progress towards decarbonising the economy will not fall behind what is required to meet legal obligations through the 2020s. A very pressing question is therefore what steps the Government will take during this Parliament to make sure that targets to reduce emissions for the 2020s and beyond are achieved in a cost-effective way?
We briefly set out here an overview of the developments since May and what may yet be to come.
Immediately following the outcome of the election the government advisory Committee on Climate Change's progress report (published 30 June 2015), set out key recommendations for action in this Parliament. The specific recommendations for DECC (and the Treasury), on the power sector are:
- Ensure it can invest with a 10-year lead time: ahead of 2016 Progress Report set the carbon objective for the power sector in the 2020s. DECC with HMT.
- Continue with auctions under Electricity Market Reform with the next low-carbon auction by end-2015.
- Ahead of 2017 Progress Report set out approach to commercialise, including completing the two proposed projects and contracting for at least two further ‘capture’ projects.
- Support offshore wind until subsidies can be removed in the 2020s: ahead of 2016 Progress Report set out intention to contract 1-2 GW per year with a view to removing subsidies in 2020s.
- Transparency over the cost implications of technology choices: including the cost of alternatives if low-cost options are constrained, system integration costs and the full carbon cost of fossil-fired generation. CCC to review in 2016 Progress Report.
The Summer Budget delivered on 8 July 2015 included the first of a number of government policy announcements. It included the announcement that the Government would be removing the Climate Change Levy (CCL) exemption from renewable electricity from 1 August 2015. There would be a transitional period for suppliers, from 1 August 2015. There then followed the publication of the draft Energy Bill which included the legislation required to implement the closure of the Renewables Obligation (RO) for onshore wind one year earlier than expected. Further, contrary to the Committee for Climate Change's recommendation to implement the zero-carbon homes standard, the government announced that this would be scrapped.
The following week on 15 July 2015 Amber Rudd, in her first appearance before the House of Commons Select Committee as the new Energy Secretary, made her first statement on her department's priorities for 2015 - but not yet beyond. The threefold objectives for the power sector remain security of supply, affordability for consumers and decarbonisation. Translating these high level objectives into policy requires the government to clarify how it aims to balance them, in light of the current trade-offs such as that contracting low-carbon capacity currently adds to the cost for consumers.
Amber Rudd said "no-one can see" what the exact route to cutting emissions will be, but she confirmed that under her leadership the department would concentrate much more on the carbon reduction targets than the renewable energy targets. She also admitted that the current policy trajectory could risk not meeting the fourth carbon budget in the 2020s. She promised to provide more clarity and to make an announcement on the future of the Levy Control Framework (LCF) budget soon.
When questioned on the timing of the next CfD allocation round Amber Rudd refused to be drawn on future allocation rounds or the announcement to confirm such rounds. However, in response to being pressed on the Conservative manifesto commitments on onshore wind and what that might mean for the next CfD allocation round, she stated that she ‘wouldn’t expect’ onshore wind to be part of the next round.
On 22 July DECC announced a number of further changes for subsidies for renewables including:
- removing the guaranteed level of subsidy for biomass conversions and co-firing projects for the duration of the Renewable Obligation (RO)
- a consultation on controlling subsidies for solar PV of 5MW. It is consulting on early closure and removing the guaranteed level of subsidy for the duration of the RO
- a consultation on changes to the preliminary accreditation rules under the Feed-in Tariff (FIT) scheme followed by a wider review of the scheme to drive significant further savings.
We have written in more detail on the subsidy changes in our article 'Putting the wind up the renewables sector'.
Investment into industry and the power sector depends heavily on clear government policies, as well as supportive frameworks and mechanisms to incentivise investment. The Treasury's new Productivity Plan published on 10 July 2015 (and before DECC made its policy announcements), is based on the twin policy initiatives of encouraging long-term 'public and private' investment and 'promoting a dynamic economy'. The updated National Infrastructure Pipeline published alongside the Plan reports that the largest sector is Energy at £245 billion and 60 percent of the pipeline’s value. It provides for £78 billion of expenditure between 2021 and 2030.This the Climate Change Committee considers is consistent with overall deployment under the EMR Delivery Plan 100 gCO2/kWh scenario although further funding is required to be on track to around 50-100g/kWh by 2030 (identified by the Climate Change Committee as being the on the cost effective path to the 2050 target).
If the Pipeline is not to be jeopardised then the industry's concern over the government's carbon objective beyond the 2020s will have to be addressed. What is urgently required by the industry is a clear forward plan and beyond the 2020s. The power sector is a major source of emissions, estimated at around one quarter of total UK emissions. Where established but carbon intensive methods of generation may out-perform the new technologies, only a high and rising price for carbon could level the field. Decarbonising energy requires sustained government intervention over a period of time. The key risk to future progress is the current uncertainty over the long-term policy framework. Too much policy uncertainty may eventually tip the balance for investors to locate projects elsewhere.
The recent debate about whether there is enough money left in the £7.6bn by 2020/21 (plus 20% headroom) Levy Control Framework (LCF) pot to meet the UK's EU goal of 15% renewable energy by 2020 and to decarbonise the grid has only added to the current uncertainty in the power sector. The most recent Office for Budget Responsibility figures predict a rise in the total expected cost of environmental levies to £9.1bn in 2020/21. This is a huge swing from the £6.6bn figure that the previous government considered had been allocated as at September 2014. While this is in line with the extended LCF cap, DECC maintains that there are already enough renewables projects in the pipeline to meet the targets.
DECC more than other departments is subject to conflicting interests which are difficult to reconcile; business and consumers want secure and cheap energy, the power sector which must provide this is at odds over how to deliver it and this in the context of pressure from the environmental lobby. The new Conservative government is also different from the previous coalition in which the Liberal Democrat partners weighed in the balance in favour of renewables. It has a slim majority that relies on the support of a number of backbenchers who are openly hostile to certain renewable technologies.
The power sector is likely to see some further announcements before the end of this year. Amber Rudd has said that the Government hopes to make a final investment decision on Hinkley C later this year. The Climate Change Committee is due to publish its advice on the fifth carbon budget by the end of 2015. It has said that this will take into account any further delays to new nuclear build and the risk that they may reduce the contribution that it will be able to make towards power sector decarbonisation. Also expected in the Autumn are the totals for the LCF beyond 2020 and the Government's plans in respect of future CFD allocation rounds. The Treasury will publish its Spending Review on 25 November 2015. This seems like the likely time frame for further announcements.