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Budget blog - What might the Treasury say?

Posted By Gordon Edge, 15 March 2016
Updated: 24 March 2016

In all the frenzy about Brexit, one can be forgiven for forgetting that there is a rather important political/economic date imminent – the Budget. Given the apparent takeover of energy policy by the Treasury, the Budget this year is taking on even more significance, with some crucial announcements potentially on the cards.

The key issue to look out for is budget available under the Levy Control Framework (LCF), both in the immediate future and the longer term. This is a complicated area. Government’s recent policy changes have been primarily driven by a perceived need to rein in spending to within the current LCF envelope, which grows to £7.6bn in 2020 (in 2011 money). Early in the term of the current Government, figures were released indicating that they projected an overspend of £1.5bn above that figure. A number of factors were pointed at, including higher than expected demand for support through the Renewables Obligation and Feed-in Tariff, higher than expected load factors for offshore wind, and lower than expected electricity prices – this last driving greater draw on the LCF from the new Contracts for Difference (CfDs). However, Government has been less than fully transparent about how it has modelled the budget use, making assessment of whether there is any money left in the pot difficult.

We have been trying to model future LCF use within RenewableUK. With a number of the policy changes behind us, and the RO level set for 2016-17, the possible range of outcomes is narrower than it was in the middle of last year, but there are still uncertainties. However, best modelling efforts appear to indicate that budget use still overshoots the trajectory every year out to 2020. It’s worth noting that if the wholesale price projections that Government published when the LCF was set in 2012 (which are higher by about £20/MWh) were to be used instead, the story would be very different. There is a further problem, though: current and forward power prices are about 50% lower than those being used by DECC for the next two years. The risk is of further downward revision in DECC’s power price forecast and a worsening of the ‘overspend’.

So it appears unlikely that Treasury would sanction any budget for further CfD allocation ahead of 2020, unless there was an over-riding reason to do so, outside of meeting environmental or renewable energy targets. Security of supply could be one such reason, though a more pertinent one is likely to be to protect supply chains and project pipelines that will be needed post-2020, when new budget is available and tough decarbonisation targets need to be met. The things to look out for on Budget day are the latest OBR figures for the LCF, and any word on budget for the promised CfD allocation round later this year.

If Government determines that there is no more money before 2020, then budgets for future allocation rounds will have to come exclusively from the settlement that is made for the LCF post-2020 – and only projects delivering in the 2020s will have access. So far, that post-2020 budget has not been set out, and Budget would appear to be an obvious point at which to do so. While having clarity on that budget would be helpful, there is a worry with an imminent announcement: Government has made no attempt to consult with the industry about anything to do with the future level of budget, and nor has there been any indication of a change to the accounting for the CfD. The risk is that the structural problems of the current LCF are just continued, leading to a similar problem of uncertainty over the ‘buying power’ of the LCF as the volatile wholesale price leads to budget use depending on exogenous factors that are likely uncontrollable. The win-win opportunity of making the LCF a more dependable investment signal, reducing risk and therefore cost of capital and strike prices, would be lost. So look out for any statement on the LCF, but be careful to interrogate the meaning of a large budget number.

In all, there may be important news on Wednesday. It just may not be quite as good as it sounds.

Article originally posted on Business Green 14/03/2016

Tags:  2020  Budget  CfD  DECC  government  LCF  Treasury 

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Leadership abroad leads to leadership at home

Posted By Maf Smith, 14 December 2015
Updated: 15 March 2016

Many people have already given thanks for this weekend’s Paris deal. This significant international agreement shows how countries can choose to work together for their own short and long term ends, and take action which we all know to be necessary.

Speaking after the deal to an assembled press conference, Amber Rudd was clear that in the end the thing which secured the deal was political will, and the politicians there who showed leadership and signed up to an agreement that was far from perfect, but still vital. Having said this, Amber clearly didn’t want to imply that the contribution of others wasn’t important, but she was right to point out that at the end of the day only politicians could close the deal.

An important treaty like this shows the value of that mysterious thing – political leadership. Often allusive, it’s sometimes hard to track down, but obvious when it shows itself. A lot of political leadership has been witnessed in Paris these last two weeks.

An example of such leadership in the run up to Paris was the work of Philip Hammond in the FCO, who travelled the globe stitching a deal together and who has started to build a dialogue with Republican climate sceptics. Let’s hope that he keeps this vital work up.

What we need now though is political leadership at home. The recent energy reset speech has helped steady some nerves but there remain more questions than answers about Government priorities. Ongoing concerns over energy efficiency, renewable and CCS programmes show that problems are wide ranging and the continued lack of a clear narrative causes many people to question which direction Government wants to take us in.

The Committee on Climate Change has shown that in the next decade we will need to take out twice as much carbon from our electricity system as we are set to do this decade, which is a long way from the “we’ve done enough position” some would have us believe.

Its fifth carbon budget, recently submitted to Parliament, suggests a continued growth of renewable energy in the 2020s. The CCC has seven scenarios about our path to decarbonisation. All involve a substantial increase in onshore and offshore wind generation. Their least cost pathway sets out a significant increase of wind energy between today and 2030.

In contrast to the CCC, in DECC’s own scenarios, updated alongside the recent “reset” speech, DECC proposed capping renewables at 2020 levels and instead seems to suggest we rely on additional interconnection to keep the lights on and cut carbon. Relying on the French, Dutch and Norwegians isn’t credible. And it’s not leadership.

Government now needs to make up its mind though. The Paris deal and the new Fifth Carbon Budget gives the UK a chance to set out a fresh plan and a clearer Conservative carbon narrative.

Former Energy Minister Greg Barker has written that ‘sceptic voices on the Tory backbenches are finally starting to recede into the rear view mirror of history’ and along with those sceptic views must be left behind the old arguments and false choices between growth and low carbon.

All of us want to know how Government will look to use markets to drive down costs and drive out carbon; how it wants to use better, leaner regulation to deliver innovation; and how it wants to broker private sector investment and expertise to minimise risks to the public sector and the public purse.

In the UK’s renewable industry Government has a partner willing to take on this role. We now see that with the Paris deal we know what some in Government have sometimes seemed unwilling to say - that it is committed to climate change action at home and abroad, today and tomorrow – cannot be doubted. We know that deeds will have to follow from this.

Tags:  2020  Amber Rudd  CCC  DECC  Paris 

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Wind is the Solution

Posted By Maria McCaffery, 09 December 2015
Updated: 15 March 2016
It’s great to see that the SolutionWind campaign has been generating a buzz at COP21, the United Nations climate change talks in Paris. One of the key messages of the campaign is that many of the world’s biggest companies are using wind as their primary renewable energy source. The roll-call of Chief Executives going on the record to highlight the key role of wind energy in their business model is impressive, as it includes the CEOs of the likes of Google, Ikea, Lego, Unilever and BNP Paribas, among many others.

Unilever has committed to using 40% renewable energy, including wind, by 2020, as well as working towards a 100% goal in the future. Their Chief Executive Paul Polman has been taking an assertive stance, commenting that in some parts of the world “we’re still seeing too many fossil fuel subsidies and we need government support to level the playing field”.

Amen to that – we’re advocating fair competition in which newer technologies are nurtured, planning laws are balanced so that they don’t penalise one technology while promoting another, and there’s a recognition that polluters must take financial responsibility for their emissions.

It’s good to see that Mr Polman recognises the strong business case for energy efficiency too, with his company consuming 20% less than it did in 2008 - even though it’s continuing to grow. As a result, the company has already saved an amount of energy equivalent to the quantity needed to run 40 factories – a good example of how business is doing its bit to tackle climate change.

The Chief Executive at BNP Paribas, Jean-Laurent Bonnafé, notes that the investment case for wind energy is clear: it’s a mature technology with a successful track record of introducing technological innovations, it provides a predictable revenue stream and it’s increasing economically competitive.

His last point is particularly applicable to onshore wind here in the UK, where it’s one of the most cost-effective of all our energy sources. That’s one of the reasons why we’re working so hard to ensure it has a future. We need to see onshore wind farm projects included in future CfD auction rounds, as well as measures to ensure that householders, farmers and small businesses can generate their own power using small and medium-scale wind energy, so that we can continue to demonstrate that renewables offer good value for money.

There are many other great examples. Lego has invested £288m in an offshore wind farm and has a long-term goal of producing more renewable energy than the power it uses. Google powers 35% of its operations through long term Power Purchase Agreements mostly from wind energy. The company says these are attractive because they’re cost-competitive and offer long-term visibility in terms of pricing – and predictability is a valuable commodity.

For these successful companies, wind makes good business sense, so they’re making substantial, long-term investments in onshore and offshore wind energy.

I’ve noticed that Unilever’s Paul Polman has been particularly pro-active yet again in the last few days, praising the British Government for committing £5.8bn to a climate resilience fund to help the poorest nations most affected by global warming, as well as sticking to its policy of providing 0.7% of GDP for development aid.

He’s also right to continue to hammer away on other important issues. He told the BBC that “there are also some areas where I would expect the UK obviously to be a little bit more progressive, for example the risk of reducing the subsidies for wind or solar would send the wrong signal at this point in time."

When business leaders are lining up to argue the robust economic case for providing political backing for wind energy, all parties would do well to listen. COP21 has provided an ideal forum for the debate to be aired on the world stage. If we are to tackle climate change effectively, wind is a big part of the solution.

Tags:  2020  COP21  Lego  SolutionWind  UN  Unilever 

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