Subsidy overhaul spooked investors and could send bills spiralling, government report finds

  • Westminster.

    The report has called upon DECC to issue a clear statement of policy direction by May at the latest.

The Conservative government’s overhaul of renewable energy subsidies has spooked investors and could add as much as £120 extra to average household bills, a select committee report has found.

The damning report concludes the Energy and Climate Change select committee’s examination of investor confidence which started last September as a result of a string of cuts to renewable subsidies, many of them related to solar.

Its findings also appear to directly contradict the Department of Energy and Climate Change’s (DECC) much-vaunted aim of protecting bill payers from increased costs.

The committee identified six factors that it said combined to significantly damaged confidence in the UK market, including a lack of transparency in decision making processes, inconsistent and contradictory approaches to policy, a lack of “long-term vision” and the creation of a policy cliff-edge from 2020 onwards.

It states a list of immediate priorities that must be addressed, most notably greater clarity over how existing policy mechanisms will be used. Of particular interest to the committee has been the Levy Control Framework (LCF) and its application as a budgetary measure.

The report argues that the LCF has been seen as “the root of many of the recent policy alterations” and has assumed a “central role” in energy policy.

Particular criticism was levelled at the LCF for its failure to take a holistic view of whole system costs – many parties have noted how the Merit Order Effect is not taken into account when forecasting costs – and how spending forecasts and underlying assumptions have not been made public.

DECC has faced substantial criticism over its failure to publish details relating to the inner workings of the LCF, refusing to answer questions by citing commercial sensitivity and dismissing freedom of information requests as “wholly unreasonable”.

There remains scepticism over how forecasted spending under the LCF in 2020/21 leapt from £6.25 billion in October 2014 to £9.8 billion in July 2015, leading many contributors to the report to suspect that some of the underlying assumptions had been changed.

The select committee has now called on DECC to answer five questions on the LCF in particular, namely the assumptions being made on built-out capacity, load factors, the number of projects which will go ahead, future wholesale energy prices and the proportion of the budget earmarked for CCS projects.

The report cites evidence from numerous parties, including electricals supplier ABB which said: “At best the step change in policy is indicative of a government that is allowing short term politics to get in the way of long term policy, and at worst it is policy making without any rationale or clear intent.”

However perhaps the most contentious evidence was contributed by investment firm – and long-standing partner of UK solar giant Lightsource – Octopus Investments, which claimed that the government’s tinkering of energy policies stood to add as much as £3.14 billion in costs each year. These would be passed onto consumers, adding as much as £120 onto average bills.

Such a figure would significantly outweigh the purported savings made by the government by stripping renewables subsidies. Cuts to the feed-in tariff and Renewables Obligation are expected to save bill payers as much as £5 each year by 2020/21. Even the circa £30 saving claimed to be made under the reformed Energy Company Obligation (ECO) scheme has been doubted.

Angus Macneil, Scottish National Party MP and chair of the ECC select committee, said that the government must make a clear statement of its energy policy direction by May this year in order to ease investor uncertainty.

“Billions of pounds of investment is needed in order to replace ageing energy infrastructure, maintain secure energy supplies and meet our legally-binding climate change targets. Since coming to office in May, the government has made a number of sudden and unexpected changes to policy.  This has spooked investors and left them wondering 'what will be next?’,” he said.

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