It has been one year since the House of Commons turned blue and the Conservatives won a slim majority in the 2015 general election. Since then, the Tories have put in the foundations to allow their manifesto pledges to be rolled out – and now they are free of the restraining influence of the Liberal Democrats.
Cutting costs and lowering bills for consumers have been the main drivers behind the austerity-focused government. This has seen the renewables sector hard hit, with support for onshore wind, solar and biomass cut completely or hugely reduced, while carbon capture and storage (CCS) has been another victim.
The water sector has also felt the Tory force, with a plan to extend competition to the household water retail market by 2020.
All these changes haves not gone unnoticed in the investor community, with all of them creating uncertainty – something investors do not like. The biggest uncertainty factor so far has been the referendum of the UK’s membership of the EU (see box).
Freed from the coalition, the Conservatives are now “rolling back the policies that the Lib Dems championed in government with unseemly haste”, according to new Lib Dem leader Tim Farron.
Just over a month after the election, the Renewables Obligation for onshore wind was cut back by a year, with energy secretary Amber Rudd saying it will “keep bills as low as possible for hard-working families”. Support for solar and biomass was also scaled back as the Tories sought to gain control of the levy control framework, which was £1.7 billion over budget.
This move was abiding by the mantra set out by chancellor George Osborne that “going green shouldn’t cost the earth”. This was also demonstrated when the £1 billion carbon capture and storage competition funding was scrapped.
Further savings were made with the abandonment of the Green Deal, and the promise of a new plan on energy efficiency that would either be “more efficient” or much reduced, depending on your political viewpoint.
Shadow energy minister Alan Whitehead has warned that a more ambitious programme is needed rather than a short-term focus on saving costs.
These changes have formed a “jerky evolution” of energy policy, according to Whitman Howard analyst Angelos Anastsiou, and these “jerks” have hit investor confidence in energy policy. The UK has plummeted from 4th to 11th in the EY renewables investor attractiveness index, and EY energy corporate finance leader Ben Warren warned that by prematurely withdrawing support, the government risks “stalling or killing projects”.
In water, the Treasury has asked Ofwat to conduct a cost-benefit review on the impact of the domestic competition by the end of this parliament – and the regulator is due to report back in the summer. However, with the government eager to pursue competition, it appears a done deal.
A year on from the Commons turning blue, the Conservatives have stuck to their agenda on competition and austerity. They have reset energy and cut back on policies developed in conjunction with the Lib Dems, establishing a platform for blue policies to be rolled out over the next four years.
The Brexit referendum
The 23 June referendum has brought with it significant uncertainty despite its being a manifesto commitment
Energy secretary Amber Rudd has come out strongly in favour of remaining in the European Union, saying leaving it could cost the energy sector £500 million a year and would give the country a “massive electric shock”.
Her Decc colleague and energy minister Andrea Leadsom has accused In campaigners of “scaremongering”, and highlighted the massive internal divisions within the country’s ruling party.
If the UK electorate does vote in favour of Brexit, utilities will be plunged into an uncertain world –and one that will have a huge impact on investor confidence and policy.
Creating waves in water
Household competition in water is going to be pushed through before non-domestic competition has proved itself.
The Conservative government was formed just over a month after AMP6 began for the water companies, a process that represented a significant shift from previous price controls with Ofwat’s shift to totex and to output-based regulation.
With work well underway for the competitive market for non-household customers to open in April 2017, the sector would have been looking to fly under the political radar.
However, at the end of November, the Treasury unveiled a master plan to increase competition across a number of sectors – including in water.
The Treasury asked Ofwat to conduct a cost-benefit analysis of introducing household competition by the end of this parliament in 2020.
The initial reaction was largely positive, with Ofwat chief executive Cathryn Ross saying it could result in more customer engagement, lower prices, better service and encourage water efficiency. MOSL chief executive Ben Jeffs, the man tasked with ensuring the non-domestic market opens on time, also “welcomed the clarity of thinking” from the government.
The move had been expected by the industry over the medium to long term, and concerns were raised about the timescale.Johanna Dow, Business Stream chief executive, said she thought it best to wait for any issues with the non-domestic market to be ironed out first.
Ofwat is due to complete its report in the summer, but the Conservatives seem keen to pursue their pro-market agenda, saying “following this, the government will work with water companies to begin the transition to household retail competition”.
With the competitive agenda going into overdrive, the sector is still waiting for Defra to begin the process of abstraction reform, which is expected later in this parliament.
With the only concrete development being the Treasury’s call on Ofwat to review the impact of domestic competition, Whitman Howard analyst Angelos Anastasiou tells Utility Week the sector has had little choice but to “just carry on as before”.
Opinion
Mike Harrison, Principal consultant, JBP Energy
It has been an unnerving year for the energy sector under the first Conservative government in nearly 20 years. After five years of compromise with the Lib Dems from the implementation and demise of the Green Deal and despite cross-party support for the passage of the Energy Act 2013, energy policy and delivery uncertainty seemingly continues.
The wind has been taken out of the onshore wind sector’s sails with early closure of financial support and changes to the planning regime. However, while this policy was in the Conservative manifesto, just as with solar subsidies it was an emergency stop rather than a managed approach. This put many companies out of business and left investors and developers in other areas of the sector wondering if they would be next.
The Paris Deal was lauded as a success around the world and one of the early supporters was the UK government. However, in the era of cheaper oil and gas, its unintended consequence on the Levy Control Framework (LCF) going over budget unnerved the Treasury and angered many Conservative MPs who are less than supportive of the case for renewables. So energy secretary Amber Rudd “reset” the UK’s energy policy with gas and nuclear being
the winners and coal to close by 2025.
Shadow energy minister Alan Whitehead also warned last October that the UK needs 20GW of new gas but there are a dozen plants with planning permission still without investment mechanisms to support their construction forthcoming. So given this cross-party support and planning permissions in place, you would think for the second auction of the capacity mechanism, whose founding principle was the delivery of new-build gas, would ensure it delivered just that. Yet it delivered another set of embedded diesel generation. But the government claimed victory for the consumer because this capacity was obtained at a “good” price. But many in the investment and development communities asked. at what cost?
And then we come to nuclear. The current energy mix predications are that the UK requires around six new nuclear power stations. But the first, a £28 billion plant at Hinkley, has been delayed yet again until this autumn with the EDF chief being summoned to parliament to explain it. Should a power station cost £28 billion when a gas power station would cost a fraction of that and could be built in three years? This deal seemingly is more of a political decision then what a market can deliver.
So one year into this current administration and we are still left wondering just what the government’s energy policy is and can it actually keep the lights on in a low-carbon future?
Mike Harrison, Principal Consultant – JBP Energy