The Government last month rejected a change to the Energy Bill proposed by the Lords back in October 2015 apparently signalling its continuing commitment to cutting renewables subsidies with a view to lowering energy bills for consumers. However, with technologies such as wind and solar among the cheapest forms of power generation the Government faces an uphill struggle to back such claims up.
The change would have seen the removal of the Government’s controversial proposal to close subsidies such as the Feed in Tariff (FiT) and Renewables Obligation Certificates (ROCs) early. The Government argued that the subsidies were over budget and costing consumers extra money. Industry on the other hand pointed out that the most common technologies to utilise the subsidies, solar and wind, are the cheapest of renewables. Furthermore, industry highlights the fact the international price of gas is the chief reason why the renewables subsidy budget – known as the Levy Control Framework (LCF) – is overdrawn.
As a rule of thumb when the strike price for electricity goes down (this happens when the price of gas goes down) the LCF pays (and costs the Government) more. Likewise when the price goes up the LCF pays less to generators. In coming years it is projected that the Government will gain valuable income as prices rise and generators pay the Government as part of new Contracts for Difference (CfD) – which have been set to replace ROCs since 2013.
The issue hasn’t been so much that the Government is withdrawing subsidies – this has been planned for many years and industry had planned accordingly. The problem is that the Government has hastened the end of the current subsidy regime before developers have had the chance to bring projects to fruition. Subsidies have been closed a year early – for developers with projects six months or a year away from financial close there has been millions of pounds and many years of time invested into getting to this point only for projects to be shelved or abandoned altogether.
The Government’s push to contain the costs of solar and wind has been in part fiscally driven but the main driver is Conservative Party antipathy to onshore wind in particular. This was evidenced in their 2015 general Election manifesto pledge to “halt the spread of onshore wind farms” and “end any new public subsidy” for wind developments. Not only is the Government seeking to stymie subsidy support, it is also seeking to tighten planning rules governing onshore wind turbine deployment. Fine if you live in a national park, problematic if you live anywhere else.
The Government, which faced criticism over the proposals when the bill was first heard in summer 2015 had initially suggested there was little room for negotiation with peers over the subsidy. Amber Rudd, Secretary of State for Energy & Climate Change had reiterated this position, citing the pledge to scrap the obligation in the Manifesto in the face of a clamour of dissenting voices. The criticism was not just from opposition parties, but also business, pressure groups and NGOs arguing the early closure of the renewable energy subsidy is hugely damaging for the economy, future energy security and the environment. Indeed back in September when the Bill was first debated the then Director General of the CBI John Cridland suggested the move could risk losing the UK billions of pounds in potential overseas trade in the green economy.
Seemingly in a move to minimise further obstacles to the bill’s passage through parliament in in what is already a very crowded legislative calendar, Decc announced ahead of the February parliamentary recess that they are considering proposals put forward by the wind energy industry to alter key aspects of the bills offer to the sector.
The proposals would, in short, mean providing wind energy contracts on a subsidy free basis – with support only kicking in if prices plunge in the event of a market shock. This underwriting, rather than subsidisation will provide a key financial guarantee for lenders and get projects to market. Details of the proposal have yet to be fleshed out but it is clear that this approach would mean a smaller impact on consumer bills.
The proposal is dividing members of the Conservative party and the Government with some including former Environment Secretary of State citing the Government’s manifesto pledge to end onshore wind farm subsidies. We can expect to see extensive debate There is likely over the definition of ‘new’ in the Conservative election pledge to “end any new public subsidy” for onshore developments as the proposed funding arrangement could, in theory be viewed as a reformulated offering through the Renewable Obligation.
If the Government bows to internal criticism and chooses not to give much ground on this, the Bill could be set to divide the Government and House of Lords once again. The Commons Energy Committee last week resolved to reinstate the clause removed by the Lords detailing the closure of the RO and this will once again be sent back the Lords after the report stage and a further reading in the Commons. We may well be about to witness another impasse between the two chambers which could plunge Westminster into yet another unhelpful period of procedural and constitutional naval gazing.
The arguments over the upper chamber’s ability to vote down Government legislation are well rehearsed and it is not necessary for us hash out the rights and wrongs of the actions of respective houses. Nevertheless the Salisbury Convention can certainly be satisfied in the event the early removal of subsidies are overturned because budgets were allocated until 2020 before the 2015 Manifesto commitment was made.
What we should be concerned about are the implications of the Bill in its current form for both business and communities – jobs in this sector are estimated northwards of 40,000 UK wide. The impacts of the removal of renewable energy subsidies could be far reaching, especially in a country running with barely 1% spare electricity capacity at peak times. It is important that industry continues to interrogate the decision to drop support early. Indeed, the Lords is playing a vital and reasonable role translating the needs of investors who collectively employ many thousands of people as well as drawing inward investment into UK Plc.