Does the cap FIT?
Two weeks on from the publication of DECC’s consultation on reforming Feed-in-Tariff (FIT) levels for solar PV, and the industry and political row rumbles on.
DECC’s decision to slash the tariff rate for solar PV installations from 43p/kWh to 21p/kWh with just six weeks notice has caused outrage in the solar industry.
The Minister in charge, Greg Barker, is no doubt licking his wounds. For a sincere supporter of decentralised renewables, to have been forced into cuts such as these in order to avoid breaching a Treasury imposed cap on spending must be galling. It is of course difficult to have any sympathy given the inept and damaging way in which the Government seeks to introduce the changes. DECC’s decision to apply the new tariffs rates to all installations after 12 December – 11 days before the consultation even ends, has left it open to judicial review, and businesses in turmoil.
At the heart of the row is the innocuous sounding ‘Control Framework for DECC levy-funded spending’. The framework was created by the Treasury and essentially acts as a cap – set for the duration of the spending review – on the costs of most policies paid for through household energy bills. ‘Most’ is a key word here – the cap only applies to those policies classified by the Office for National Statistics as ‘tax and spend’, rather than regulation. (The question of whether arcane decisions by the ONS should be able to dictate the longevity of key policies is one for another blog post.)
The £11.8bn of funding allowed under the cap between 2011 and 2015 has, essentially, been allocated. What does this mean for the rest of the energy sector? A quick reflection on just two policies gives cause for concern.
Firstly, the Energy Companies Obligation (ECO), the Government’s method of funding energy efficiency for poorer households. The Government has put much emphasis on the importance of ECO for making the Green Deal energy efficiency programme work for fuel poor households.
ECO’s two predecessors, the catchily titled CERT and CESP, count as ‘regulation’ and so are outside of the cap. But it is difficult to see that ECO will not be classed as ‘tax and spend’ given that it is essentially a mechanism for raising and distributing cash. It’s perfectly possible that Treasury will just allow DECC to simply raise the cap level to accommodate ECO. But will George Osborne be willing to sign off on yet another policy that will add potentially £2bn a year to hard pressed consumers energy bills? One can imagine his special advisors will have something to say about the likely Daily Mail headlines.
Secondly, and in the longer term, the experience of the last few weeks should be ringing alarm bells over electricity market reform. DECC’s own Q&A on the issue says it is too early to say whether EMR measures will be classified as levies and therefore subject to the framework. But unless Government intends to fund the new Feed-in-Tariffs for large scale renewables through direct taxation (which is certainly a possibility, though of course one with its own investor confidence issues), the money will have to come straight from energy bills.
So what might happen if we end up with levels of offshore wind that see a spending cap exceeded? Or if half way through a planning application for a nuclear power station, the cap is met?
This may be a somewhat crude characterisation, but it is difficult to believe that international businesses considering multi billion pound investments in electricity generation projects in the UK will not look at what has happened to solar in recent weeks.
Investor certainty is at a low point in the UK energy market – just at the time when we desperately need new projects coming forwards. The Government has made much noise recently about the role of infrastructure investment in delivering growth. If this is more than window-dressing for George Osborne, he might want to consider how his department, and DECC, can work in a way that attracts, rather than deters, investors to our energy sector.