The direction of travel for renewable generators is now clear, even to any hardened subsidy abolition deniers out there. Key policy decisions include:
- Closure of the Renewables Obligation (RO) to new onshore wind from 1st April 2016;
- Closure of the RO to new solar over 5 MW from 1st April this year;
- Consultation on closure of RO to new solar under 5 MW from 1st April 2016;
- Abolition of the renewable power Climate Change Levy (CCL) exemption from 1st August 2015;
- Abolition of the Green Deal; and
- No Contract for Difference (CFD) auction this October.
Contrast that with the approval of the construction of two gas-fired power generation plants by Progress Power Ltd in Eye, Suffolk, and by Hirwaun Power Limited near Aberdare in South Wales – with an accompanying comment by the Minster for Energy and Climate Change, Lord Bourne that “Gas is the greenest fossil fuel we have; generating electricity with only half the emissions produced by coal.”
The RO was due to close for new entrants in March 2017 in any event, so on one level the current RO changes are merely an acceleration of long standing policy.
But the perception may have been that the CfD auction cycle would be predictable and frequent. Whereas the Government’s current emphasis is on controlling the Levy Fund (to bring it under the cap of £7.6bn in 2020-21) and the rhetoric focuses on protecting consumers from bill increases.
The scrapping of the Green Deal may make sense in light of low take up but the Secretary of State had previously been at pains to emphasise the need to encourage demand side measures as well as supply.
The direction of Government Policy
So where does this leave Government policy?
At Aviva’s ‘Climate Change: The Financial Implications‘ conference held on 24 July 2015, the Secretary of State for Energy and Climate Change contended that “If we act in the right way, decarbonisation supports our other priorities. By focusing on storage and reducing energy demand, not just generating more energy, we also help to meet our energy security needs. By focusing on energy efficiency we help keep bills down for people and businesses”.
Rather than focusing on the effects of the CCL renewable exemption abolition on renewable generators it may, in a policy context, be more relevant to view this as the iron fist approach to promoting energy efficiency by big business.
Maybe there will be a velvet glove around the corner (or at least no rowing back on non- domestic RHI for example).
And abolition of the Green Deal – a domestic consumer measure – does not diminish the Government’s intent to push large scale energy users to adopt more energy efficient processes.
Energy efficiency contracting
If, one way or another, the pressure increases on big business to reduce energy usage this may in turn provide a boost for large scale energy efficiency products. In particular “one-stop shop” energy management contracting solutions.
Typically these products might be structured such that:
- The contractor provides capital investment for a range of demand side measures;
- A long term staggered investment programme is agreed between contractor and client;
- No payback of the capital investment by the client until a certain level of energy savings are made – thereafter savings split between contractor and client;
- Savings calculated using various measures (eg reduction in tariff or simply reduction in consumption), depending on the assets installed;
- Balance treatment solutions to seek to ensure the assets provided do not sit on the client’s balance sheet.
These products are becoming increasingly sophisticated.
For example, in the US the first MEET (Metered Energy Efficiency Transaction Structure) contract was signed last year between Seattle City Light and the owners of the Bullit Foundation commercial premises.
- Under MEET the energy contractor installs energy efficiency assets and pays a rent to do so to the owner of the premises. Energy savings against pre-installation energy performance are metered. The owner of the premises pays the energy supplier for the energy volumes they would have paid before the retrofit (but of course is receiving a rental stream to offset that inflated liability). Any actual energy savings are then “sold back” by the energy contractor through a long term PPA to the energy supplier and the energy saved is resold by the energy supplier to another customer.
- The energy supplier is kept whole by the scheme. It receives an inflated price for the actual energy supplied and purchases the avoided energy consumption, which it can then re-sell. This can unlock the problem of utilities being reluctant to engage in energy efficiency schemes if they see them simply as a route to reduced revenues due to reduced consumption.
- The owner of the building is incentivised to engage in the project through the rental payments made by the contractor.
- The energy contractor (possibly split with the owner) receives the proceeds of selling the saved energy to the energy supplier.
A policy driven focus on energy demand rather than supply may create a healthier market for these energy efficiency products and encourage further innovation.