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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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Marine energy goes truly international in Edinburgh

Posted By Maf Smith, 11 March 2016
Updated: 15 March 2016
Last month, 860 people from across the globe gathered in Edinburgh to debate and push forwards the development of wave and tidal energy. Guests from 27 countries (including the UK) were brought together as part of the International Conference on Ocean Energy (ICOE 16). Companies, Governments and Academics attended from recognised ocean energy leaders such as the UK, France and Canada, but also countries such as China, Chile, Korea, Japan, Malaysia, New Zealand and many more. The event was addressed by a European Commissioner and Ministers from Scotland and Nova Scotia and senior officials from many Governments around the world.

What all these countries have in common is a desire to accelerate the shift to a low carbon future, and an interest in capturing the substantial wave and tidal resource which sits, just in reach off all our coastlines.

In the last decade the world has seen a massive rise in renewables, with solar and wind now common and often major players in most electricity markets. Most countries underestimated the growth of these technologies, with consumer pressure and cost reductions leading to faster adoption than most energy experts anticipated. Last year Bloomberg New Energy Finance reported how renewables accounted for over 50% of investment in new energy capacity, a significant shift underlining the level of confidence and the mainstream nature of these technologies.

In the UK and increasingly abroad we have seen rapid growth of offshore wind, with innovation and deployment pulling costs down aggressively. Our future is going to see a significant role for solar and wind. What is not clear though is the scale and pace of development of other technologies, such as wave and tidal.

Right now wave and tidal sits at a critical point. Early technological optimism has set back the industry because rash over ambitious promises could not be fulfilled. But this ambition has driven a lot of learning, from successes and failures.

Just along from the Edinburgh Conference Centre, the National Museum of Scotland is building a permanent science and technology display to mark Scottish scientific achievements. Here will sit things like Sir Ian Wilmot’s Dolly the Sheep and information on the work of Sir Peter Higgs, who famously proposed the Higgs Boson, which was later confirmed in the Large Hadron Collider after many years of international scientific effort at CERN.

Alongside this will sit Salter’s Duck, the original wave machine which first demonstrated that electricity could be effectively generated by our seas. Stephen Salter proved his device at the University of Edinburgh which today is home to the world’s most advanced wave tank, Flo-wave, which can test devices in different sea states. Visitors can visit the tank and see technicians combine different sea characteristics to produce standing waves, perfect storms and one in 100 year events.

The day before ICOE16, Scottish Development International and Highlands & Islands Enterprise flew almost 100 of our international guests to Orkney, to visit what is probably the ocean energy equivalent of CERN – the European Marine Energy Centre. Active for over 10 years, EMEC has been home at one point or other to most of the globe’s wave and tidal prototypes, and through this has advanced our knowledge of how to capture wave and tidal energy.

While there have been many breakthroughs in wave and tidal, what has yet to happen is demonstrable cost reduction, and many of the conversations at ICOE16 were about how to deliver this. These pioneering technology companies are painfully aware that rapid progress is expected, and the need for rapid decarbonisation means that they will not have the luxury of time afforded to their technology forebears. The first commercial tidal stream project – Meygen - will begin construction next year off the north Scottish coastline. A lot is riding on the experience of this project, though other tidal companies are waiting in the wings also confident about their own devices.

To prove the existence of the Higgs Boson governments funded the international science community over to the tune of $13 billion. The discovery is important in opening up our understanding of particle physics. This applied research is critical to how we advance as an innovative economy.

In contrast the successors to Stephen Salter have proved the viability of wave and tidal on much smaller budgets, and with significantly more private sector investment. Every £1 of public money has levered in a further £6 of private investment, and brought us to the point of first commercial deployment.

The case for wave and tidal is still to be proven, but for me the pairing of Higgs and Salter in the National Museum is significant. To advance we need to take risks, and we need to follow up high level research with applied learning. From Cornwall to Kirkwall there are many internationally recognised companies hard at work to prove their ideas and make wave and tidal a reality. The international visitors to Scotland came to learn about this experience, and the exchange of information shows how we can all benefit from international cooperation. Talking to international delegates I was struck by how Scotland was judged as leading the field. Over coffee after a morning of discussion one Canadian delegate said, “well you guys are really going for it aren’t you.”

However, while we receive plaudits from abroad for our advanced research, the case for support here at home is less clear. Our industry needs to acknowledge that it has more steps to take, and has much research it needs to conduct. However, we should not shy away from pride in our record of learning and achievement.

While ICOE16 was addressed by many governments, notable was the absence of any UK Minister or UK official. The UK can be proud of what is has helped deliver – a world leading industry still confident of delivering a commercial breakthrough. On the back of national research from governments in the UK, Portugal and France, we are now seeing ambitious European funding support being assembled which our UK companies are well placed to capitalise on. Today, our Government is actively promoting innovation and further research funding for emerging energy technologies. It would be right to question the time taken for wave and tidal to deliver, but it would be wrong to conclude that it do not have a future. This is true when we consider how other technologies are allowed significant amounts development time, and benefit from long term support programmes aimed at helping them deliver. And it is particularly true when we are held in such high international regard for our world class research and industrial leadership.

Tags:  Conference  Edinburgh  ICOE16  Scotland  Tidal  Wave 

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Innovation: Waiting for Ofgem?

Posted By Dr Gordon Edge, 15 February 2016
Updated: 16 February 2016

Another day, another event about innovation. The latest was Ofgem’s “Innovation in a transforming energy system” event, in which the energy regulator set out its approach to technical and business innovation. This follows on from the various network innovation funding streams that Ofgem has presided over, and the consultation last year on ‘Non-Traditional Business Models’ (NTBMs, for those who like acronyms). While Ofgem should take some credit for trying to get on the front foot, it seems held back from taking a strong lead. If we are forced to wait on Ofgem taking on that role, however, I fear that, like Vladimir and Estragon ever hoping for the arrival of Godot, we shall be waiting a long time.

The room was full for Ofgem’s exposition of what it is doing in the area, followed by presentations from InnovateUK (snazzy, though somewhat lightweight) and the Financial Conduct Authority. The latter provided some interesting read-across from another regulatory body, and seemed to have some good lessons in terms of getting down on the innovators’ level and giving them time- and situation-appropriate advice on what would and wouldn’t work from a regulatory perspective. But overall there was a sense of Ofgem wanting to play the game by saying ‘the door is open – come on in’, but not actively striving to make innovation happen.

To an extent, this is a function of being on the edge of a predicted market transformation. While there are lots of exciting technological developments here or clearly coming soon, the environment to allow them to be adopted and flourish is only now starting to be developed. For there to be real progress here, then Ofgem and Government have to follow through quickly on the agenda to move to principles-based supply regulation (which would make the taking on of a supply licence much less onerous), having half-hour settlement for all consumers, and driving the uptake of smart meters and smart grid solutions alongside the move from DNOs to DSOs (Distribution Network Operators to Distribution System Operators). All these are only just starting to happen, and will take some years to deliver and bed down.

As an aside, it is interesting to note the submission by Ovo Energy to the NTBM consultation, which raises the issues of retail regulation and half-hourly settlement as priorities: the author? One Guy Newey, who is now… Amber Rudd’s Special Adviser. And now we seem to be getting action on these issues, including having the latter in the new Energy Bill now before Parliament for pre-legislative scrutiny.

So we seem to be being told to both hurry up and to be patient. We’re hurrying to get the new technologies and business models in place to support market-led development of mature renewables, but waiting for all these enabling regulatory and policy changes to happen. This is a delicate balance. If the two parts don’t advance together, then the businesses investing in innovation will fail because of a lack of viable business models.

What is needed is a pacesetter to force the pace and promote real-life demonstrations of pairing up local generation with local demand, using new technologies such as storage and demand-side response to provide local area balancing. At the Ofgem event, Judith Ward from Sustainability First hit the nail on the head, saying that to tackle specifically the issue of developing ‘energy ecosystems’ in cities, real-life pilots would have to pushed through, tackling the layer upon layer of barriers that lie in the way of making this a reality. This is just as applicable in rural areas, in fact more so, as this is where local, distributed renewable resources could have the ability to cover an area’s entire needs.

I’m not seeing such a scheme being talked about, let alone being planned anywhere in particular, various municipal supply initiatives notwithstanding. I’m waiting. But I’m not holding my breath.

Tags:  energy  Innovation  Ofgem 

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What the Papers Say about our future energy market

Posted By Maf Smith, 15 February 2016
Updated: 18 February 2016
It’s been a busy media weekend for renewables. First up, Emily Gosden dug behind the exchange between Energy Minister Andrea Leadsom and Peter Lilley MP at DECC Questions on Thursday 11th February.

Peter Lilley asked the Minister about work on a no subsidy contract for difference, and asked if this will reflect the value of the electricity. For him the value of the electricity depends on the time that it is produced, where it is produced and how reliably it is produced and he is sceptical of the ability of renewable electricity to deliver.

In reply the Minister said “On the subsidy-free CfD, he is also right that we must take into account all the various costs. We are looking at the matter very closely. I am not making any promises here, but, alongside other subsidies and other CfDs, we are looking carefully at the proposition.”

Emily Gosden’s incisive Telegraph article looked at this issue in detail. What is interesting for me is how some are mistakenly thinking this is a debate about future support for wind. But it isn’t – it’s about how to make sure our energy market works properly to deliver a reliable, diverse supply at lowest cost.

My brief appearance in the article was to highlight that an energy market which excludes technologies like wind or solar would be anti-competitive. And if you look at the different views in the article you can see there is a lot of common ground hidden behind the contrasts.

The UK’s energy challenge is how to keep the lights on at lowest cost, while keeping within carbon reduction commitments. This means moving away from dirty coal toward low carbon options like renewables, CCS and nuclear.

One problem Government has is that wholesale energy price is a weak price indicator not strong enough to encourage new investment. It is effective as a “dispatch signal” in the day ahead and hour ahead markets; making sure that the lowest price options are used first each day. But it cannot work as a long term price signal to encourage the construction of any new power plants. Anyone who insists that only new power plants which can build at this wholesale cost is wishing on the UK an era of power station blackouts and instability. Instead Government is using an auction system to provide longer term price certainty for new power plants in a way that minimises cost to the consumer.

Everyone in this debate agrees that subsidies must end. They would like to see markets strengthened rather than undermined, so that competition forces innovation and reduces cost better than it is doing now. And they would like to see the market recognise the full costs of that energy system. Where the parties differ is that renewable generators want to see the cost of carbon, and the full system costs of different energy types both factored in. Others though only want to talk about the latter.

We can see that there is a lot of agreement on the principles, but disagreement on how to embed these into the market in practice.

The last five years have seen some significant changes in the energy market with auctions introduced to contract for new generation and subsidy programmes such as the Renewables Obligation all now scheduled for closure. This shift is necessary, but not complete. Innovation is transforming how we use energy, and there is no going back to a time when we simply relied on big power stations providing power via big energy utilities.

And this shift is what Danny Fortson lays out in his excellent piece about the future of energy utilities. It’s quite a coup to get two Big Six CEOs saying that the model needs to change, and they echo the views of National Grid CEO Steve Holliday who said last year that “The idea of large power stations for baseload is outdated.”

Both Emily Gosden and Danny Fortson are sketching out the fast evolution of our future energy market and the debate we need to have about this. Advocates of renewable energy want to see their technologies able to compete, and are confident they can deliver on cost and performance. They will do this because renewables costs are falling and new innovations are coming to market which better price in different system benefits and costs. They are also making energy generators and users more responsive to price signals. The question then is: why stand in the way of greater competition?

We already use the Capacity Market to ensure capacity adequacy and Contract for Difference auctions to provide low carbon power. Some further tweaks to these will make sure we can deliver lowest cost power free of any subsidy.

Commentators like Policy Exchange and the Conservative Environment Network are clear that onshore wind and solar are already cheaper than new gas plant. If we make sure that new gas plant pays its way and is not subsidised, then there is no reason not to continue these capacity and power auctions. Leadership from Government means action to ensure a stable power market: we can then be confident that consumers have the lowest cost route to a secure and low carbon source of power. This is something everyone wants.

Tags:  CfD  DECC  electricity  government  markets 

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Time for Government to Think Big on Small Renewables

Posted By Maf Smith, 02 February 2016
Updated: 15 March 2016

Today, Baroness Featherstone, the new Liberal Democrat Energy spokesperson, will attempt to keep alive the support programme which makes small scale renewable projects happen.

The process is quite arcane, but the debate that lies behind it is critical for the future direction of small scale renewables, so bear with me, and perhaps also marvel at the way the House of Lords works. Baroness Featherstone has tabled a “Humble Address” which seeks to annul the Government “Feed-in Tariffs (Amendment) (No.3) Order 2015”. A Labour motion to debate the Order in the Commons looks unlikely to succeed and so today’s debate is likely to be the only effective Parliamentary scrutiny this legislation will receive. Its impact, however, will be felt by households, communities and rural businesses across the country.

This Order, which the Government introduced as a statutory instrument just before Christmas 2015, will radically change how the small scale renewable energy market works. Government has decided to drastically cut levels of support given to schemes, and to introduce caps on spending. The reaction from the wider public was significant. Energy policy is normally arcane and hard to follow. Energy only usually gets seen as a political issue when people debate energy costs. But Government has seen that people also want to know where their energy comes from, and were appalled that in future it would be harder for householders, schools, farmers, communities and small businesses to install their own renewable energy equipment. In fact people were so appalled that over 60,000 of them wrote to the Government about it as part of its consultation on the changes.

All those people wanted to see Government think again, and we did win some important concessions introduced into the Feed-in Tariff scheme. And of course some of what has been proposed is absolutely necessary – all those who make use of the scheme know that costs have to be managed better and we should only support renewable technologies at a level that is affordable.

What is a tragedy in all this is the fact that Government is introducing major changes to a popular scheme without putting any thinking into the longer term role of small scale renewables, or what comes after the Feed-in Tariff. Its approach is more all or nothing and betrays a lack of imagination or creative thinking. The consultation had no views on the merits of the scheme or how to support continued growth of small scale generation in the absence of subsidy. The statutory instrument has been lodged in Parliament without any thinking or debate about how we best support ordinary people and businesses to meet their own energy needs.

Instead we have a process which has been little more than an accountancy exercise. The need for Government to manage the costs of the Feed-in Tariff has blinded them to thinking about alternative ways to support small scale renewables, or to thinking about what the longer term plan is.

But for the Conservative Party this shift to decentralised energy, and to more people having power over their own energy generation, was exactly what they stood for in opposition. Fast forward to 2016 though and there seems no pride in the fact that over 10% of farmers now have their own wind turbine and are better equipped to manage food and energy price shocks. Thanks to renewables these farmers are more resilient; their businesses are healthier and the overall rural economy is healthier.

Thanks to the Feed-in Tariff, the UK built a vibrant small scale manufacturing industry. Up to the end of 2014 UK manufacturers exported one turbine for every one they sold at home, and we led the world in this area. Now though that UK market is disappearing and these small manufacturers are either going out of business or looking very carefully at how they better supply to other markets.

So now we have a sector in decline. But there is no discussion about this. In its decision about changes made to the Feed-in Tariff there was no long term view about how the companies behind this small scale revolution can be encouraged to get off subsidy. Government did not consider the use of tax incentives or innovation funding to encourage businesses to generate their own energy. Nor did they look at the mountain of red tape that makes it so expensive for anyone to install their own renewable energy equipment, and plays some part in making subsidies necessary in the first place.

So it is good that we have a motion tabled and the chance for the House of Lords to debate this issue. Lynne Featherstone’s motion may not succeed, but hopefully she will succeed in raising Government’s ambition, and forcing a debate about whether the UK is still serious about decentralising how energy is generated and used, and putting power back into the hands of the families, schools, farmers and small businesses across the UK.

But whatever happens in the debate, what we do know is that we need a long term plan and a renewed political consensus about how we make sure that keeping the lights on, cutting our dependence on fuel imports and tackling climate change is the responsibility of everyone and needs to happen in big and small ways.

 



Feed-in Tariffs (Amendment) (No. 3) Order 2015 Baroness Featherstone to move that a Humble Address be presented to Her Majesty praying that the Order, laid before the House on 18 December 2015, be annulled (SI 2015/2045). 20th Report from the Secondary Legislation Scrutiny Committee.

 

Tags:  Feed-in-Tariff  government  Liberal Democrats 

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