The energy industry, particularly the climate change sector, has waited with baited breath for what would be revealed in the UK Government’s Comprehensive Spending Review. As expected, there has been some good and bad news.
The feed-in tariff
The feed-in tariff (FIT) will be maintained at its current rate until the next scheduled review in 2013. The review in 2013 will involve a refocus on “more cost effective carbon abatement technologies”. Slightly worryingly, the press release from the Department of Energy and Climate Change (DECC) included the proviso that a review will not take place before 2013 “unless higher than expected deployment requires an early review.”
However, by and large, the Government’s announcements on the FIT are being positively received, because over the last few months there had been increasing speculation that the Government would prematurely reduce or completely withdraw the FIT scheme, which came into force on 1 April this year.
Industry concern culminated with the publication of an open letter addressed to Chris Huhne calling for the FIT to be maintained at the current rate, until its scheduled review in 2013.
Any future changes to the FIT will not affect existing projects, unless the Government retrospectively withdraws support to existing projects. Any such action is not currently contemplated by the Government but if it was then it would no doubt provide considerable industry backlash and a legal challenge, as it would strike at the core of the stable regulatory system that underpins investment in the UK. Ofgem has recently expressly reiterated that the way the scheme works is that once registered for FITs, the generation tariff received will last for the tariff lifetime and be adjusted annually for inflation. Some of the tariffs reduce in Year 3 onwards (i.e. 1 April 2012 to 31 March 2013) – but this will only apply to new installations registered during that year. Likewise, any review of tariffs in 2013 will not affect the generation tariffs of generators already on the FIT scheme.
The Renewable Heat Incentive
The Renewable Heat Incentive (RHI) is to be introduced from June 2011, a two-month delay from its originally proposed start date. The Government will be providing £860 million funding for the RHI and will not be taking forward plans to fund the scheme through a renewable heat levy. The funding is being provided over the Spending Review period (2011-12 to 2014-15), and presumably, given that a set amount of funds is to be made available, the RHI will only be available to new applicants until the funding is exhausted. DECC has said that it will now consider further the operation of the scheme, including vital details such as RHI tariffs and the technologies to be supported. DECC is planning to speak to stakeholders in the next few weeks ahead of an announcement on the detailed design of the scheme before the end of the year.
The CRC Energy Efficiency Scheme
The news is not so good for large businesses required to participate in the CRC Energy Efficiency Scheme. On a positive note, the Government has said that the scheme will be simplified to reduce the burden on businesses, with the first allowance sales for the 2011-12 emissions now taking place in 2012 rather than 2011. However, revenues from allowance sales of £1 billion a year by 2014-15 will be used to support the public finances, rather than recycled to participants.
The Green Deal
As part of the drive to save money, DECC is to “develop innovative ways of working with the private sector, acting as an enabler rather than the default provider". A key part of this policy is the previously announced Green Deal, which is to enable households to improve the energy efficiency of their house at no upfront cost, repaying through the savings they make on their energy bills. The Green Deal is one of the measures to be introduced by the Government’s planned Energy Security and Green Economy Bill, and will take the form of a new legal mechanism allowing the obligation to repay the costs of energy efficiency measures to attach to the energy bill at a property, rather than to an individual.
This is to be complemented by the extra support to reduce energy bills and help to improve heating and insulation that is to be provided by energy companies to combat fuel poverty – this is the previously announced new obligation on energy suppliers that will be introduced under the Energy Security and Green Economy Bill.
The Government has said that these measures will allow the Warm Front public spending programme to be phased out over time.
The Green Investment Bank
The Government will initially capitalize a new institution with £1 billion of funding together with additional significant proceeds from the sale of Government-owned assets, subject to a final design that meets the tests of effectiveness, affordability and transparency. Funding of £250 million will be made available on the basis that the Scottish Executive agrees to the drawdown of funds from the Scottish Fossil Fuel Levy surplus. The institution will be able to reinvest the proceeds from its investments.
A fund of £200 million has been earmarked to support offshore wind technology and the development of the country’s ports to support the sector.
Carbon capture and storage
The Government has committed up to £1 billion of investment for the first commercial-scale carbon capture and storage demonstration plant. However, it is unclear whether the Government will go ahead with the levy provided for in the Energy Act 2010, which was intended to fund four CCS demonstration projects.