Spring Budget begets questions for renewables industry
For the renewables sector, the Chancellor’s budget speech is now something you brace yourself for the worse, followed by a frantic poring over of the red book for a small line that has the potential to do damage to the industry.
In that regards, this budget surpassed expectations, yet still managed to introduce new uncertainty over the future of the levy control framework (LCF) and further delayed the decision over the carbon price floor (CPF).
Both of these decisions matter. The LCF gives investors an indication of the future scale of government support, the CPF a price signal to make decisions by.
There is no doubt the LCF is a flawed system. When first introduced both Feed-in Tariffs (FiTs) and the Renewable Obligation (RO) clearly had the potential to give Treasury severe headaches. It was useful, however, as the LCF gave developers the confidence there was government support, and consumers a back-stop protection from overspend. However, with Contracts for Difference (CfDs) there was always the perverse potential that when wholesale prices were low and investment more difficult, there was less in the purse, and when wholesale prices were high and projects easier to finance, there was more room in the LCF.
With FiTs and ROs being phased out, a replacement for the LCF now that the CfD is the main policy tool is utterly sensible. The government will have the complete support of the renewables industry if they consult quickly and give investors early sight of the new plans. 2021 is not that far away, and large projects looking at commissioning in five years’ time will start making initial decisions now.
The CPF has been much maligned, yet even at its current levels has been successful in shifting coal out of the market in favour of gas. The CPF provides a stick with which to hit coal in the short term, but fails in providing much of a carrot for new projects, especially renewables.
It is universally acknowledged that the CPF could be a major tool in the future, yet there is large disagreement over price, trajectories and targets. One thing we all agree on is that it needs to have long term visibility and an unbreakable guarantee from the government. Taxation is a notoriously flimsy basis on which to base an investment decision, ask anyone who factored LECs into their calculations.
The delay and lack of certainty over both of these policies make the investment environment more difficult in the short term, but they are nothing compared to the larger systemic problems with the UK energy policy.
The UK needs new power capacity; there is a broad consensus around that, if not so much agreement on how much we need and by when. This feeds into the much repeated mantra of the ‘energy trilemma’ of cost, low-carbon and secure generation. Obviously those are three competing, although not impossible, priorities, which cannot be driven in a free market and has required significant government intervention. The government restated the importance of cost in the recent Industrial Strategy green paper.
However, in the past 18 months we have seen unprecedented withdrawal of support from renewables, with solar and onshore wind the headline casualties, but moves against biomass, energy from waste and even the fledging marine sector have been significant yet underreported. The government is intervening to unparalleled levels in shaping the technology mix, and doing so in ways which are counterintuitive to the stated priorities of the trilemma. One only has to look at the blind faith in large projects such as Hinkley C to underline that point.
This is why signals such as the CPF and LCF are so crucial to investors in technologies not being pushed by government. The market is moving away from the large centralised model currently being backed, but need a strong carbon price and future government support to achieve that. The budget was a missed opportunity, but with the long awaited Emissions Reduction Plan surely coming before the autumn budget, there may be reason to hope.
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