Wednesday's confirmation from the Department for Energy and Climate Change that renewable subsidies are in the firing line won’t have come as much of a surprise to the industry, but that hasn’t failed to prevent vehement opposition to the proposals.
Criticism has been stark and forthright but Jon Ferris, head of energy markets at Utilitywise, believes at least some of this would be better directed at other policy decisions – most notably the removal of the exemption for renewables from the Climate Change Levy – which ultimately see consumers taxed on renewable energy without ever contributing towards its growth in the first place. This money, Ferris points out, simply goes straight to the Treasury.
What did you make of DECC’s proposals yesterday?
A lot of the focus in the last couple of weeks has been on those costs that fall under the LCF, and they tend to be the ones that support renewable energy generation through things like the FiT, RO and CfDs. It shouldn't really be a surprise given that the trajectory and the cap was set a number of years ago and the rules were pretty clear that if projections showed that the total spend would exceed the cap, the government would then have to make changes to the scheme – or the schemes that fall under it – to come down and keep costs below that gap.
What's been missing from the debate is the extent of the costs that come from green taxes which just go straight to the treasury and don't support renewable generation or energy efficiency. Things like the Climate Change Levy which, with the announcement within the budget, will no longer support renewable generation. There’s also the Carbon Price Floor, the auctioning of EU Emissions Trading Scheme allowances and the carbon reduction commitment. In 2014/15, these totalled £2.5 billion, which is just being paid straight to the Treasury.
Would you argue that's perhaps more of a contentious issue than cuts to subsidies?
I would. Yesterday's developments were clear that, with projections of an overspend against the LCF, action would have to be taken. You can argue whether the cap is appropriate, but that's an argument that should've been had when it was set. There's also an argument about what are the causes of the overspend, and there's been lots of talk about how falling wholesale prices have had an impact. The reality is falling wholesale prices have had a very small impact on the overspend because the largest elements of the LCF are not affected by wholesale prices.
CfDs will be – the lower the wholesale price, the bigger the top-up against the strike price – but for the next few years that's a small amount and even by 2020/21 that's only about 25% of the spend under the framework. Some of the other aspects like faster take up of the FiT and the RO have been a bigger cause, but we see the FIDeR contracts have been the biggest contributor to the overspend in using up the LCF budget.
How significant do you expect renewable energy companies to be hit by the CCL exemption removal, with some asset managers already forecasting a 3-5% hit on revenues?
The point that jumped out at me was that if you include the carbon reduction commitment, there are large costs that are being paid by consumers. If the Treasury is concerned by the consumer cost, then perhaps it should look at some of these other schemes where, from this year to next, the total cost of the green levies going to the Treasury is going to increase by 36%, whereas the green levies going to support renewables generation are going to increase by 28%.
Are solar and other renewables now paying for mistakes made by DECC in previous years?
I think it's clear that when those contracts were awarded the remaining budget for the auctions under the CfD was greatly diminished, so it's been taken up much quicker because 58% of the budget was taken up by eight projects under FIDeR.
One of the particularly contentious points from DECC's announcement was the claim decisions were being made to protect consumers from high costs, but DECC's own assessment places the cost of running the RO as planned at around 80p per household bill. Is that fear mongering?
I think DECC has largely been backed into a corner. Yes, they're having to justify these decisions, but if you look at what's already been committed under the LCF under RO contracts, the FIDeR and the CfDs, there really isn't very much that they're able to cut to try to reduce the overspend. Given that the projections are that there'll be an overspend, they do have an obligation to make a change to the scheme. They really are in a difficult position. They have to do something, there's not much they can do, and the impact of what they can do is going to be minimal. But they don't have the option of doing nothing.
What do you make of recommendations that tax breaks and other incentives could replace subsidies under the LCF?
I think there is a challenge for an industry that's making a big play on subsidy free in the future to then ask for what they describe as non-subsidy support. I think that would be seen as a subsidy by the general public. But it does seem a bit more consistency between arrangements for oil and gas, nuclear, and renewables would probably be better accepted across all industries and the public.
And what shape do you think a future LCF will look like post 2020?
I think it's pretty obvious that post-2020 there will be an element for new nuclear within the LCF. Having made statements about how Hinckley will come under that framework it's not a surprise that it will be extended beyond 2020, it is a worrying development that the arrangement for Hinckley Point C appeared to be made under a similar approach to the FIDeR contracts as opposed to the competitive technology-neutral auctions for more established technologies.
Could, or should, the government look at a competitive tender for nuclear in the future then?
The problem you have with the competitive framework – particular if it's for nuclear and it's not technology neutral – is that the auctions only work if you have a sufficient number of bidders. You can see the problems with the first round of the CfD auctions where some solar farms bid in at £50/MWh, and that cap wasn't sufficient for the projects to go ahead. For nuclear to come into an auction mechanism, there either needs to be competition for providers or it needs to be competing with other generation technologies, such as solar. But I struggle to see how that will be the case given the government's desire to go ahead with nuclear.