Changes to energy policy lack transparency

3rd March 2016


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IEMA

Greater clarity is urgently needed on how decisions about UK energy policy are made to undo damage to investor confidence caused by a series of sudden changes, a group of MPs has concluded.

Publishing the findings of its inquiry into the impact of the changes, the cross-party energy and climate change select committee said the unexpected cuts to subsidies for renewable energy and the scrapping of policies such as zero carbon homes and the green deal had spooked investors and left them wondering what might be next.

The Treasury needs to factor the impacts that its decisions will have on investor confidence more explicitly into the policy-making process, the committee said. It should introduce investment impact assessments to ensure new or changes to policies do not inadvertently discourage the investment that is desperately needed, it recommended.

The committee found that engagement with the investor community by the government over policy changes had been poor. The MPs highlighted the lack of transparency on spending forecasts under the levy control framework (LCF), which sets a cap on the amount of subsidy provided to low-carbon energy.

The committee criticised ministers at Decc for failing to meet promises to publish the assumptions and methodologies used to calculate projected spending under the LCF, which it said was particularly important to investors in assessing risk.

The MPs urged the government to explain what assumptions had been made about how much energy generation capacity would be built; what load factors would be achieved; how many pipeline projects would actually go ahead; and what future wholesale energy prices would be.

The government has been slow to develop new policy, the committee said. It must urgently set out a plan to deliver the fifth carbon budget, which should be developed in full consultation with investors, with modelling work open to external scrutiny.

Committee chair Angus MacNeil said that cutting support for low-carbon energy today may prove to be a false economy in the long run since any increase in the cost of project capital would ultimately be passed on to consumers through higher energy bills.

‘We are concerned that the government is only considering short-term costs to consumers when it makes energy policy decisions. It needs to pay more attention to the impact of its decisions on the energy prices paid by the next generation of bill payers,’ he said.

Investors giving evidence to the committee included ABB, the Environment Agency pension fund, the Institutional Investors Group on Climate Change, Octopus Investments, Old Mutual Global Investors and Schroder Investment Management.

Octopus Investments said policy changes that increase risk premiums could cost the UK an additional £3.14bn a year in financing costs for renewable energy.

The committee acknowledged that the effect of the government’s actions has not been as great as in some other countries where similar retrospective policy announcements had cause investment to collapse. However, it highlighted EY’s renewable investment attractiveness index, where the UK fell from eighth to 11th place between June and September 2015.

The committee’s scrutiny revealed that the full impact of the government’s subsidy cuts might not be apparent until the end of the decade. Although there is no shortage of money available to fund projects that have advanced to the late construction or operation phase, projects earlier in the pipeline are seeing investment dry up, it found.

Nick Molho, executive director of the Aldersgate Group, said: ‘The committee is right to highlight the recent dip in investor confidence in the sector. What has been particularly damaging is the lack of an alternative plan accompanying recent policy changes, rather than the changes themselves.’

The CBI said clear leadership and stable policy was required to attract investment in energy infrastructure. Rhian Kelly, CBI business environment director, said: ‘The government needs to work with business to achieve this, and we’ve seen some positive steps recently, including moves to look at some measured reforms to the capacity market.’

But Nina Skorupska, chief executive of the REA, said: ‘The government talks about reducing costs to consumers, but their decision to instead support nuclear and subsidise new diesel and gas in the capacity market is adding new expense.’

The report's conclusions echo those of the committee's recent report on the sudden withdrawal of a £1 billion funding pot for carbon capture and storage. This also highlighted the lack of transparency in the government's decision.

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