Going backwards?

30th September 2015

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Recent announcements have put at risk investment in technologies to green the UK economy, finds Paul Suff

Among President Barack Obama's latest measures to support the expansion of clean energy and energy efficiency in the US is an additional $1 billion of federal government guarantees for renewables. The White House said the package, announced on 24 August, was intended to accelerate America's transition to cleaner sources of energy and support ways to cut waste. Three days later in the UK, energy and climate change secretary Amber Rudd published a consultation on proposals to slash the financial support for renewables through the feed-in tariff scheme. It followed announcements from the government on ending funding for onshore wind, removing the renewables exemption from the climate change levy and the axing of measures to improve the energy efficiency of buildings. The contrast between the approaches of the two countries could not have been starker. So, what are the details of the UK government's measures and what impact will they have?

Feed-in tariffs

The feed-in tariff (FIT) scheme was introduced in 2010 to encourage deployment of low-carbon electricity generation up to and including 5 MW. The proposed changes include reducing tariff rates from January 2016 for:

  • domestic solar PV installations of up to 10kW from 12.9p to 1.63p/kWh and for commercial rooftops from 3.69p/kWh to 2.28p/kWh;
  • wind projects of up to 50kWh from 13.73p to 8.61p and those between 50kWh and 1,500kWh from 10.85p and 5.89p respectively to 4.52p; and
  • hydro generation from 15.45p and 14.43p to 10.66p for schemes up to 100kWh, and from 11.40p to 9.78p for installations with a capacity of between 100 and 500kWh.

Decc says a consultation on tariff rates for anaerobic digestion (AD) projects will take place before the end of the year. In July, Decc consulted on removing pre-accreditation under the FIT scheme, which gave generators a guaranteed tariff level in advance of commissioning their installation. It had been available to solar PV and wind projects above 50kW as well as to all hydro and AD projects, but ended on 1 October.

Decc justifies its planned changes to the FIT regime by claiming the cost of subsidies is higher than intended. Total FIT payments, which are added to consumer bills, are exceeding the cap under the Levy Control Framework (LCF), says the department. It notes that the annual LCF ceiling for 2020/21 is £7.6 billion but forecasts by the Office for Budget Responsibility suggest expenditure will reach £9.1 billion - a 20% overspend.

The department also says that it has met the projections for deployment of anaerobic digestion (AD), wind, and hydropower (including projections currently pre-accredited but not generating) set out in the 2012 FIT review, and that it expects to be within the projected deployment ranges for solar photovoltaics (solar PV) by the end of the 2015/16 financial year. It points out that, at the end of July, the scheme had supported 730,000 installations, just 20,000 short of that forecast by the 2010 impact assessment. Rudd said the future and size of the FIT scheme would be determined by affordability criteria. "If following the consultation we consider that the scheme is unaffordable in light of these [new tariffs], we propose ending generation tariffs for new applicants from January 2016 or, alternatively, further reducing the size of the scheme's remaining budget available for the cap."

The renewables industry argues that lower subsidies will cost jobs and postpone the date at which solar PV, for example, reaches "grid parity" - when the cost of solar-generated electricity falls below that of alternative means of supply - and subsidies are no longer needed. The industry in the UK has already reduced its costs by almost 70% in the past five years, with a further projected 35% decrease by 2020 in levelised costs (the average cost over the lifetime of the plant per MWh of electricity). A report in July from KPMG concluded that solar PV is likely to be the first renewable energy technology to achieve parity.

James Court, head of policy and external affairs at the Renewable Energy Association (REA), says the changes will add years to the date when solar reaches parity: "It was looking like 2020 for some installations, but that is unlikely to happen now. Solar has come down in cost so dramatically in the past five years and has grid parity in its sights. But the industry feels like it's having its legs cut away metres from the finishing line."

Mike Landy, head of policy at the Solar Trade Association, describes the FIT proposals as self-defeating. "It will create a huge boom and bust that is not only damaging to solar businesses and jobs but does nothing to help budget constraints. We are astonished at how self-defeating these proposals are."

The AD industry is in a particularly awkward position, given that it has yet to discover the level of future FIT subsidies the government will offer it. Nonetheless, the consultation proposes capping new FIT expenditure at between £75 million and £100 million in 2018/19. The Anaerobic Digestion and Bioresources Association (ADBA) says this will seriously damage investor certainty and therefore further deployment. ADBA chief executive Charlotte Morton says: "The FIT consultation proposes restricting support for anaerobic digestion to just 17 new plants next year - which would mean in effect an 80% cut in investment for an industry that deployed 89 clean baseload power plants in 2014."

She says further growth in capacity will be hindered by the government's decisions to remove levy exemption certificates (see climate change levy, p.22), which the ADBA estimates will cost the AD industry £11 million.

Scottish Renewables, which represents the industry north of the border, predicts that the proposed changes to the FIT regime will severely curtail solar and could also spell the end for much of Scotland's hydro sector, which it describes as already fragile. Joss Blamire, senior policy manager, said: "The cuts could also spell the end for much of the hydro industry, which has enjoyed a recent renaissance but relies more heavily on government support because of the length of time taken to develop projects and the sector's high capital costs."

Wind energy

The Conservative party included in its 2015 general election manifesto a pledge to end subsidies for new onshore wind projects. In June, energy and climate change secretary secretary Amber Rudd confirmed that the government would close the Renewables Obligation (RO) across Great Britain to new onshore wind generating stations from 1 April 2016, a year early. However, a grace period is planned for projects with planning consent and an offer of grid connection. The RO was introduced in 2002 (2005 in Northern Ireland) and placed an obligation on electricity generators to produce more from renewable sources. It supports the majority of existing and planned onshore wind capacity. The government has also proposed changes to the planning system to give communities the final say on developments and transfer decision-making from the Planning Inspectorate to local authorities for schemes of 50MW or larger.

According to Decc, when the projects with planning permission are factored in, the UK is on course to meet its 2020 renewable electricity objective. "We expect around 12.3GW of onshore wind to be operating in the UK by 2020," Rudd said. This is above the middle of the deployment range set out in the 2013 electricity market review delivery plan, which was for onshore wind to provide between 11GW and 13GW of electricity by the end of the decade. "We want to help technologies stand on their own two feet, not encourage a reliance on public subsidies," Rudd said. Decc says subsidies to the onshore wind industry in 2014 totalled more than £800 million. The Renewables Obligation (RO) is being replaced by contract for differences (CfDs), which, the department argues, will introduce competition for subsidy and drive costs down more quickly.

Removing financial support will scupper hopes for the construction of around 2,500 turbines, which together would produce 7GW of onshore wind capacity, according to professional services firm EY. With the cost of onshore wind set to fall further, EY says the government's decision to withdraw support contradicts its pledge to reduce emissions at least cost. Energy prices could then rise as more expensive sources, such as offshore wind, are used to fill the capacity gap while onshore wind projects fall away, it warns.

Powering up, a new report from the Policy Exchange think tank, concludes: "A moratorium on onshore wind is likely to lead to a higher cost to consumers of meeting decarbonisation objectives. For example, replacing 1GW of onshore wind with the equivalent amount of power from offshore wind would increase the cost to consumers by £75-90 million each year."

The report also assesses the impact of any decision by the government to exclude onshore wind from future CfD auctions - something that has been mooted. It says this would be a mistake, arguing that onshore wind could approach the cost of new-build gas generation by 2020 or soon after, at which point a CfD contract should no longer be seen as a subsidy. It predicts that the CfD process will deliver almost no new onshore wind in England because it would favour lower-cost projects in Scotland and Wales.

The intended changes to the planning system are also likely to curtail onshore projects in England. Under the proposals, permission can be granted only if the site is in an area "identified as suitable for wind energy development in a local or neighbourhood plan" and "planning impacts identified by affected local communities have been fully addressed and the proposal has their backing". As the Policy Exchange report points out: "This effectively halts all new onshore wind applications in England, at least in the short term, since almost 40% of LPAs do not have a local plan." It adds: "Even those that do have a plan are unlikely to have identified sites suitable for onshore wind development."

Climate change levy

The chancellor, George Osborne, announced in his summer budget the removal of the exemption from the climate change levy (CCL) for renewable source energy (RES) supplied to businesses and public sector organisations. The CCL is a UK-wide tax on the supply of energy to businesses and the public sector. Electricity, gas, solid fuels and liquefied gases have separate rates depending on their energy content. The levy was introduced in 2001 to improve industrial and commercial energy efficiency, and help reduce greenhouse-gas emissions. Renewable electricity has been exempt from the CCL since its introduction. Energy regulator Ofgem issues levy exemption certificates (LECs) to demonstrate to the HMRC that the supply is CCL-exempt. The exemption was removed on 31 July 2015.

The government says that, since the CCL and the exemption was introduced in 2001, more effective policies have been put in place to support renewable electricity generation. These target support directly at renewable generators, while the CCL exemption seeks to support renewable generation indirectly through stimulating demand. It claims that without action the exemption would cost £3.9 billion over this parliament and one-third of this value would go to supporting renewable electricity generated overseas.

Decc acknowledges that renewable generators in the UK could be affected by the change in the short term, but the value they receive from the exemption is expected to be negligible by the early 2020s. It says the measure will have no direct impact on the achievement of UK carbon budgets because emissions from electricity generation are capped through the EU emissions trading system.

However, the impact on UK companies could be significant, says Ian Holyoak at Michelmoores LLP, because around 70% of the income generated by LECs goes to UK-based energy producers rather than overseas generators. "The removal of relief represents the loss of a significant incentive for investment in renewable source energy and will, for example, have an impact on schemes that included LEC revenues in the financial modelling for their CfD bids," he says.

Renewables company Infinis said the industry understood the phase-out would not start until 2020. "Based on our initial assessment of this measure, Infinis expects a reduction in earnings before interest, tax, depreciation and amortisation of approximately £7 million in the year ending 31 March 2016 and approximately £10-11 million in the year ending 31 March 2017," it said.

At the start of September, Infinis and Drax, the operator the UK's largest power station, which has been switching from coal to biomass, initiated proceedings for a judicial review of the notice period given by the Treasury when removing the exemption from the CCL.

Energy efficiency

The coalition's flagship energy efficiency scheme was the green deal. It became operational on 28 January 2013. Under the scheme, finance was available to install a range of energy-saving measures in domestic properties. The Green Deal Finance Company (GDFC) was set up to fund providers. In July, environment and climate change secretary Amber Rudd announced that the government would stop funding the GDFC, in effect closing it. She said support for the home improvement fund cashback scheme, which has provided £114 million for 27,000 energy-efficiency measures, would also end.

The government has also abandoned its target for all new homes to be "zero-carbon" by 2016. Under this, announced in 2006, new dwellings would generate as much energy onsite as they consumed. It required developers to meet a minimum energy standard in new homes or invest in carbon reduction projects offsite under a scheme known as allowable solutions, introduced by the coalition government only last year.

When the green deal was introduced in 2012, the coalition government described it as a market solution to a market failure: the reluctance of householders and businesses to invest in energy efficiency because of the initial costs. The commercial green deal scheme never materialised, however. When further funds were released in March 2015, Decc described the green deal as a "popular scheme". But, in July, Rudd said it would no longer provide the GDFC with money because of low take-up and concerns about the quality of installations. Decc had made it clear after May's general election that curtailing its energy efficiency programmes would provide £40 million of the £70 million departmental savings it was proposing for 2015-16.

The scrapping of the zero-carbon homes policy was included in the Fixing the foundations report from the Treasury, published in July. It said: "The government does not intend to proceed with the zero carbon Allowable Solutions carbon offsetting scheme, or the proposed 2016 increase in on-site energy efficiency standards, but will keep energy efficiency standards under review."

The green building industry believes both measures will lead to uncertainty and put investment in jeopardy. John Alker, director of policy and communications at the UK Green Building Council (UKGBC), describes as frustrating the decision on the green deal and says the industry is waiting to find out what will replace it. Daisy Sands, head of energy at Greenpeace UK, says: "The green deal was far from being a success but, coming right after the scrapping of the zero-carbon homes target, this latest move suggests ministers are giving up on efficiency."

In a letter to the chancellor, business leaders from 246 organisations warn that the u-turn on zero-carbon homes had "undermined industry confidence in government" and would "curtail investment in British innovation and manufacturing". Rob Lambe, managing director of Willmott Dixon energy services, says: "This announcement seriously undermines industry confidence in government policy and will diminish future investment." IEMA is also warning that the decision not to proceed with the zero-carbon allowable solutions carbon offsetting scheme or the proposed 2016 increase in onsite energy efficiency standards would put at risk sustained progress on implementing low-carbon initiatives.

It's the economy, stupid

A study from the business department, The size and performance of the UK low-carbon economy, published in March, found that the UK low-carbon electricity sector, which includes onshore and offshore wind and solar PV, employed 140,800 people in 2013, a 7.8% increase on 2010. It had a turnover of £33.3 billion (up 6.5%) and contributed £10.4 billon (up 5.8%) in gross value to the economy. Solar employed 34,400 people, onshore wind 19,000, and offshore wind 13,700. It also reported that the energy efficiency products sector employed 94,200 and had a turnover of £16.4 billion.

The REA says employment in the renewables sector has been increasing nearly nine times as fast as in the economy as a whole. The consultation on the FIT scheme was accompanied by a separate report by Dr Colin Nolden at University of Sussex. He concluded that the FIT scheme was still creating jobs.

That is now unlikely to continue and may go into reverse. After Decc published its proposals for the FIT scheme, entu (UK) announced it would close its solar division. In a statement, the company said: "The board expects the market environment for solar to become increasingly difficult as a result of speculation about a possible increase in VAT for its solar products from 5% to 20% and uncertainties about future feed-in tariffs." It pointed in particular to a government proposal for a substantial reduction in feed-in tariffs from January 2016.

A survey by business services company EY of 10 major lenders, which over the past two years had provided about 90% of finance for onshore wind in the UK, found that half would not lend money for future projects at least until the Energy Act came into force, which is not expected until next year. The finance companies said their reluctance to fund onshore wind in the meantime is due largely to the current political and regulatory risk to the RO. If investors take their money elsewhere because the government is scrapping its support for clean energy technologies and improving the energy efficiency of buildings, jobs will not be the only casualty. It will also make it harder for the UK to achieve its carbon budgets and to establish a cost-effective pathway to reducing emissions by 80% by 2050.


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