DECC: Amber Rudd reduces subsidies for renewable energy

The UK government has unveiled a package of measures to reduce subsidies to renewable energy in what it says is an effort to keep down household bills.

The announcement was widely expected, and comes off the back of recent projections from the Office for Budget Responsibility (OBR) that subsidies for renewable energy will exceed the levels expected at the point when the spending cap, known as the Levy Control Framework (LCF), was established.

Carbon Brief looks at the reforms and collects reaction, including from Ed Davey, the former secretary of state for energy and climate change, who says the changes are “based on ideology, not on evidence”.

Unexpected spending

Subsidies for clean energy are raised through customer bills. The LCF seeks to appease both investors and consumers by ensuring that there will be the necessary level of support for new projects, at the same time as providing an overall cap on how far bills can be raised.

This cap was set at £7.6bn for 2020/21 with 20% headroom. However, the recent budget forecasts by the OBR say spending will reach £9.1bn by 2020/21, taking it to the very top of this headroom. This higher-than-expected spend was due to the fast falling prices of solar, a surge in solar capacity and generation, wind proving more productive than expected, and the low wholesale price of gas.

Carbon Brief had a closer look at the OBR’s forecasts when they were released earlier this month.

Forecasts for the distribution of the LCF between Contracts for Difference (CfDs) Feed-in Tariffs (FiTs) and Renewables Obligations (RO) up to 2020/21, in 2011/12 figures. Source: Office for Budget Responsibility/DECC. Chart by Carbon Brief

The government says that its new measures are an attempt to rein in the unexpected expenses of its subsidy scheme. Announcing the measures, Amber Rudd, the secretary of state for energy and climate change, said:

“Our support has driven down the cost of renewable energy significantly. As costs continue to fall it becomes easier for parts of the renewables industry to survive without subsidies. We’re taking action to protect consumers, whilst protecting existing investment.”

Ofgem says that “environmental and social costs” currently make up 7% – £89 – of the average household dual fuel energy bill. Using Ofgem figures, Policy Exchange recently broke down this £89 figure further showing that the Renewables Obligation accounts for £38 and the small-scale feed-in tariff accounts for £10.

Solar

The Department of Energy and Climate Change (DECC) has launched a consultation on reforming subsidies for solar projects of 5 megawatts (MW) and below under the Renewables Obligation (RO) – a government policy that requires suppliers to source a portion of the electricity they provide to customers from renewable sources.

DECC’s proposal is that, from 1 April 2016, these smaller solar projects should be no longer able to access subsidies under this scheme, while removing the subsidies that had already been guaranteed under the RO, a policy known as “grandfathering”.

A similar restriction was placed on solar farms with more than 5MW of capacity in April.

At the time, it indicated that it would continue to monitor the rate at which smaller projects were being deployed. When this consultation took place, DECC decided that projects of 5MW and below would only form a small chunk of future solar deployment. Now, estimates are showing that it could be “significantly higher”, DECC says.

In an impact assessment, DECC says the early closure of these solar subsidies would save between £40m and £100m in 2020/21.

DECC’s projections for annual spend on solar PV projects at 5MW or below in 2020/21 published in October 2014 and June 2015. Source: DECC Impact Assessment. Chart by Carbon Brief

The consultation ends on 2 September and DECC says it will aim to publish its decision soon thereafter.

Biomass

DECC has announced that it will also remove the subsidy that had been guaranteed to new biomass conversions and co-firing projects, or existing projects that are increasing the share of biomass they burn, under the Renewables Obligation.

The idea behind this is to prevent increases in biomass generating capacity. Today, there are 2.4GW of biomass conversion capacity that will convert if state aid approval is given. Without today’s changes, DECC thinks this could increase to 4.6GW in 2020/21. Preventing this from happening will, they say, avoid £500m in costs in 2020/21.

Other announcements

DECC has also said it will launch a consultation on changes to the feed-in tariff scheme, which affects small solar projects, in particular to the pre-accreditation rules that provide companies with a guaranteed tariff in advance of commissioning the project. This will be accompanied by a “wider review of the scheme to drive significant further savings”.

DECC has also promised to set out the amount within the LCF beyond 2020, although it has not specified when it will do this. Previously, this had been set to end after April 2021, leaving the renewable energy industry and potential investors in doubt about what government support would be available into the 2020s.

An extension of the LCF was the top priority of the Committee on Climate Change, the government’s independent advisory body on climate, in its 2015 progress report to Parliament released in June.

DECC has also announced that it will set out the budget in Autumn for future allocations of Contracts for Difference – a government scheme which awards funding to the cheapest renewable energy projects put forward under a sealed bid system.

Contracts worth £315m were awarded in the last round. The generosity of the next allocation round will be another litmus test of the government’s commitment to renewable energy.

Reaction

The changes have generally been received negatively by politicians, analysts and industry alike, with concerns expressed over investor uncertainty, potential damage to the solar industry, and the government’s commitment to climate change

Ed Davey, the former Liberal Democrat secretary of state for energy and climate change, told Carbon Brief:

“The danger this latest decision will have is on investor confidence in renewables in the UK, because on the back of other decisions and other rhetoric coming out of the new government, it would appear that the Conservatives are taking an anti-renewables stance based on ideology, not on evidence. I speak as someone who cut subsidies to wind and solar. I want subsidies to go in the end, because I believe strongly that low-carbon green technologies will be able to survive on their own. But the question is when you cut the subsidies, how quickly you cut the subsidies and whether you used evidence in that decision or whether you made it on the basis of crude ideology. My fear is that this is more Treasury and Osborne led than evidence and DECC led.

“I’m worried that people now think that the Levy Control Framework is overspent when actually it’s in the contingency and the headroom that was previously agreed. And it’s in the headroom and contingency because of what we planned for, namely, the possibility that wholesale gas prices might be lower than we’d expected. So, in big infrastructure projects, whether for energy or transport, you have a contingency. That’s not overspending, that’s contingency, for the reason that we can’t always predict the future. And the fact the Treasury are saying it’s ‘overspent’ shows that there’s not a rational case being made against low-carbon technologies and renewables. It’s an ideological case.”

Greg Barker, former Conservative minister of energy and climate change, said:

“Today’s announcement from DECC will be a big challenge to the UK solar industry and in the short term very problematic for a number of companies, but I really hope that the sector can avoid the hysteria and self-damaging doom mongering that we saw in 2011.We need to focus on the fact that this review is a response to much faster and more successful clean energy deployment than anyone expected; exceptional growth that has made the UK the fastest growing solar market in Europe. Amber Rudd has proved herself to be a real believer in solar and a genuine friend to the industry, but that doesn’t mean we can duck the simple truth that the budget for renewables, thanks to massively successful deployment, has now all but gone, way ahead of time. So, now, the industry needs to work closely with DECC in a genuine spirit of cooperation and financial realism to target and stretch the remaining budget in the current LCF, in the most cost effective way possible.

“Around the world, the solar industry is already operating without subsidy and there are still further opportunities to create additional value and extract further efficiency savings in the UK sector. Innovation and enhancing the customer offer are going to be key to growth and success, as the path to zero subsidy grows even shorter.

“It is time to muster up an optimistic ‘can do’ ethic and talk up the huge success and enormous potential of UK solar, not plead for years more subsidy. The government needs to listen very carefully to the most progressive voices in the sector and to focus the remaining budget in the right place but also work with the industry to help solar entrepreneurs create value with new and enhanced business models and by unblocking other barriers to growth. I am confident that working sensibly together, Amber can steer the sector through to the bright future it deserves.”

Angus Macneil, chair of the Energy and Climate Change Committee, said:

“I am disappointed that the government has made these announcements after the House of Commons has risen for the summer recess, as proper scrutiny in Parliament will now not be possible until after the consultation deadlines.

“The measures announced by DECC today raise more alarming questions for investors in low carbon, renewable technologies who are already struggling to finance projects after a series of sudden policy changes. The latest changes remove the current certainty for the lowest cost renewable technologies whilst failing to provide any indication of the future investment landscape. DECC has stated that it will set out totals for the Levy Control Framework beyond 2020 but has given no indication of when it will provide this information leaving industry in limbo.

“Energy developers seeking support under the Contracts for Difference will now be left waiting for DECC to announce its plans for future CfD allocations. It is important that value for money is at heart of decision making on energy, but removing this certainty today actually risks raising the cost of capital and thus slowing down the steep cost-reduction pathway of technologies that will be needed in the next decade.Removing support for the lowest cost renewable technologies calls into question once more the government’s commitment to meeting our medium- and long-term decarbonisation targets, sending out a worrying signal in the run up to the Paris climate change conference.”

 Emma Pinchbeck, head of climate change & energy at WWF-UK, told Carbon Brief:

“The government appears to lack vision when it comes to securing clean, affordable energy. They have muddied the waters for energy policy over the last few weeks, and we now know a lot about what they won’t do. But with ministers committed to showing leadership at the international climate change negotiations this December, we need to see evidence for what they will do to deliver decarbonisation in the UK.

“Sudden and short sighted cuts to competitive technologies like solar PV will do nothing to help investors or UK industry deliver low carbon technologies. True value for money for the consumer lies in a long-term, investable economic plan.”

Dustin Benton, head of energy and resources at Green Alliance, told Carbon Brief:

“Unfortunately, the government’s moves since the election have looked like reductions in policy ambition. Unless the government establishes the positive case for low carbon energy they’ll inadvertently stall one of the fastest growing sectors of the UK economy.

“The subsidy changes could save between £500-700m per year, or about half the OBR’s projected headroom spending in 2020/21. Reducing the risk of overpaying for renewables that are coming down in price rapidly makes sense, but reductions have to pass two tests: first, the changes need to keep the UK on the long-term, least-cost trajectory to decarbonisation.

“Second, changes need to maintain the principle of headroom spending, which exists to account for imperfect projections – including volatile gas price projections. The purpose of the LCF is to encourage investment in clean energy while controlling consumer costs. An inflexible LCF without headroom would reduce spending on clean energy while gas prices drive bills down, and push up the costs of decarbonisation in the 2020s. A flexible LCF should enable investors to develop and deploy clean energy steadily, enabling cost reductions and the lowest overall cost of decarbonisation.”

Rhian Kelly, the CBI‘s business environment director, said:

“The consultation into changes to solar subsidies will give industry the chance to make its case. Ensuring consumers’ bills remain affordable is rightly a priority for the government, but it must work with industry in order to provide consumers with long-term value. That means getting the policy right from the outset, and having in place a clear and transparent framework to give investors the certainty they need.”

Tom Burke, chairman of E3G, told Carbon Brief:

“The idea you’re going to get nuclear costs down is a fantasy – nobody believes that. Everybody thinks renewables costs are coming down, that we’re not quite there yet, so where’s the coherence in a policy that says we’re going to subsidise nuclear but not renewables? And why would an investor think that a department that takes that position was making sound, properly analytical, evidence-based judgments?

“It’s quite clear the chancellor is calling the shots, so a lot of the time you’re back in the position with investors not knowing who is going to be actually making decisions about energy policy and where you’re going to look for stability. What investors want in energy policy is stability, and what you’ve got is a government that is consistently destroying stability. And, by the way, renewables and decarbonisation and the carbon budget are a long way from being the most significant part of driving energy costs up. The most significant part of driving energy bills up for people are network decisions and services – basically utilities and the national grid costs. It wasn’t the green levies.

“Let’s be clear: this is just opportunism. This is what I think is really behind it: the Treasury has woken up to the fact that decarbonising the economy is going to be very bad for tax revenues, so it doesn’t want energy efficiency and it doesn’t want renewables because they really drive gas out of the economy, and what the Treasury wants is lots of fracking so it can generate tax revenues from royalties and taxes. There’s a massive contradiction at the heart of government policy, which Amber Rudd’s announcement makes clear.”

Michael Grubb, professor of international energy and climate change policy at University College London, said:

“This is a pivotal moment in UK energy policy, on which it is beginning to look like the UK has two governments. One is that pressing for strong international action on climate change, which signed an unambiguous cross-party pledge to phase out unabated coal, reiterated its carbon targets and which committed in its manifesto to deliver clean renewable energy as cost-effectively as possible.

“The other is a government which has moved to prematurely end supports for the cheapest of the UK’s main renewable resources, which has injected fear and uncertainty into renewable energy investors – and which seems set to also scrap energy efficiency programmes which have helped to cut consumer bills and avoided the need for billions of pounds of new fossil fuel investments. Sooner rather than later David Cameron must clarify which government he is really leading.”

Leonie Greene, head of external affairs at the Solar Trade Association, said:

“We recognise that government wants to shift the emphasis to larger solar rooftops, but we have explained to the department that these are just 5% of the UK market. More work is needed urgently to unlock larger solar roofs. There is a danger if government pulls the rug on solar farms too early, the market will have nowhere to go. This could be further compounded by changes to the Contracts for Difference auctions. What we need is a bridging strategy and we are very keen to work with DECC to achieve that.”

“We also regret this move because solar farms are close to competitiveness with new gas generation and they account for a very small proportion of expenditure on the Renewables Obligation. We’re hearing a lot of big figures from government, but they should know it is just a few quid more on energy bills to deliver nothing less than a solar power revolution in the UK. We think the British public would support that. We’re very close, but we’re not there yet. Support for solar under the Renewables Obligation currently costs just £3 per year on each household bill, and solar on makes up only 6% of the Renewables Obligation budget.”

Main image: Amber Rudd.