The End of Solar?

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

DECC is proposing to introduce further restrictions to the Feed-in Tariff arrangements for solar PV. Although the changes won’t become law until some time in the first quarter of 2012, they will be substantially effective from 12 December this year.

This is not, DECC insists, acting retrospectively. Perhaps, but it will be interesting to see what those seeking judicial review want to say.

There are three main changes to be made to the arrangements.


First the FIT payment for all levels of solar PV will be reduced, some by half - and some of the reductions made in August are to be further reduced.

Second the reduced FIT payments are to be further reduced for multi-installation schemes. Owners of multi installations will get only (around about) 80% of the new, reduced FIT payment for each scheme.

Third schemes on buildings or supplying electricity to buildings adjacent to them (e.g., field schemes sup-plying a farm) will receive a FIT payment of only 9pkWh unless the building itself satisfies some yet-to-be-determined energy efficiency criterion.

Is the government intent on ending solar PV? The price changes are aggregated and set out below.

Why DECC is doing this is well known - it has a budget and the take-up of solar has been so enthusiastic the budget is threatened.

DECC adds defiantly that solar costs have fallen and the reduced FIT payments are enough to provide a reasonable return on investment. Is that so?

An indication of the shakiness of this reasoning is DECC’s admission that it assumes 50% of electricity generated by all schemes (barring standalones) is exported. It now wonders if that is so. How can it not know and yet have a clear view about returns? Exports are a key component in calculating returns.

DECC also assumes that a return on investment of 4.5% will suffice. One wonders what it is meant to suffice for - and for whom. Is it meant to be the return to be expected by an investor on the open market? Surely not: funds demanding that low rate of return would have been inundated. Is it expected that those householders to which, DECC claims, this scheme is directed would - could - raise the funds to invest in these installations?

And if so where does the grounding for any such expectation come from?

DECC has got its figures horribly and messily wrong. It misunderstood the impact of the scheme, despite evidence of its operation across the continent. So it cut the FIT.

It then, if we are to believe it, forgot to deal with the extension rules, so rushed through further changes.

The new changes, DECC assures us, will put solar investment on a proper footing. If it had a grip on its figures we might believe it, however reluctantly. But if it is wrong? If it is as wrong as the industry claims, the end of solar is a real possibility.

(© Sally Barrett-Williams)

What Renewable Heat Incentive?

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

The Renewable Heat Incentive has been put back again - and there appear to be two reasons it has happened.

The first reason is that when the scheme was notified to the European Commission – as it must be, it's a state aid and needs their prior approval – they looked at the figures for biomass and said they were too high. This was on the basis that a state aid can be approved by the Commission only and to the extent that it is necessary for some particular outcome.

The Commission has long held the view that biomass is a good thing because it's green and can be justified on environmental grounds. Even so, the payment to be made to an investor in a biomass power plant from public funds needs to be just that amount, and no more, needed to tip the balance between the scheme being done and the scheme not being done.

The Commission took the view that there was too much fat in the RHI scheme for biomass. They sent it back for amendment - and now DECC has to re-vamp the scheme with lower biomass figures and send it on its rounds through the Houses of Parliament for approval. DECC says that it can finish its scheme revamp and start the passage through Parliament by November 31.

There is a second reason why we should expect the RHI to be held up and which may well put paid to the November 31 deadline - the use of the public purse.

DECC is in a bit of a tight spot. It agreed with Treasury (recorded in the Framework Agreement) to keep its subsidies within a cap (different caps for different subsidies). But it is having a hard time keeping solar down to the agreed budget – and many believe it hasn't managed to do so. What went wrong is that DECC under-estimated massively the solar take-up.

Government can't afford any more mistakes of the same kind; and yet, the Commission, which ought to know a lot less than DECC about DECC’s figures, has pointed up one big over-pricing mistake for biomass.

What other mistakes are there in the data for the other technologies? And will take-up similarly far exceed expectations?

These must be serious questions for government. Their severity makes DECC’s November 31 plans seem blindly blithe.

Add into this mix one extra little factor that has, over the past ten days, gathered a bit of pace and a bit of currency. In his conference speech Osborne suggested that the 2020 re-newable energy targets were not sacrosanct. That wasn't new; he has argued this for some time, saying that the UK must have targets as part of a set of targets imposed on others at an appropriate level. It's the Osborne version of the level playing field.
New it wasn't – but it was the first time in public in that kind of forum it had been said. There was – predictably – a storm.

But Cameron has not contradicted Osborne and all the succeeding DECC pronouncements, both public and private, have fallen into line. It is now policy. What exactly that amounts to is not yet clear. Meanwhile, it's worth balancing energy policy - in all its facets - with rising consumer bills, because that is what the government is doing.

We will get an RHI at some point. We might even get it in this session of Parliament. But I wouldn't bet on it. Nor would I bet that it will be the same RHI that we have already seen.

What’s Happening to the FIT Scheme?

Posted by Sally Barrett-Williams of The Carbon Catalysts Group


1 April 2010: The FIT scheme comes into operation.

11 November 2010: Greg Barker announces that government objects to stand-alone solar. He insists government won’t act retrospectively.

March 2011: DECC announces that the tariff for PV solar schemes over 50kW will be slashed from 1 August. Again DECC says government won’t act retrospectively.

March/April 2011: Industry starts to look at the extension rules under the FIT Order. DECC is also looking at the extension rules - but does nothing about them, although it knows developers are planning to use them. The extension rules allow small schemes that expand within 12 months of being built to claim the same tariff rates available before expansion.

DECC dubs this the ‘loophole’ because it means schemes partly built before 1 August will get the old, higher, tariff when the schemes are fully built.

9 June: DECC confirms the reductions for the solar PV FIT tariff. Its press statement says the change won’t apply to schemes existing before 1 August. This is confirmation that existing schemes won’t be affected. It is confirmation that DECC will not act retrospectively.

At this point it knows developers are using the extension rules.

June: During this period there are reports of energy companies talking to senior DECC officials who say that DECC knows about the loophole but does not intend to close it.

14 July: Government in the House of Lords claims solar PV was never intended to be large scale. Lord Whitty objects, saying he was involved in the last government in the FIT scheme and it specifically wanted to encourage large-scale schemes.

20 July: An email goes to members of two trade associations saying DECC has told them to tell members the extension-rules loophole will be closed. There is no public statement from DECC. There is no announcement from DECC to companies that are not association members. No-one knows or is told when this change will happen.

22 July: DECC announces its intention to close the loophole “as soon as possible”. The DECC website refers to end October.

July sometime: The reference to end October disappears, although it remains on page 3 of DECC’s impact assessment [link]

2 August: Two trade associations email members quoting from emails with DECC lawyers. The quotes say many and conflicting things but in particular they say that ministers can introduce the change in any timescale they wish. They appear also to say that ministers can introduce the change in a manner they wish.

What we are being told by DECC officials is that this government can do what it wants and how it wants.
DECC no longer says it won’t act retrospectively - because it is acting retrospectively. It knew developers were using the extension rules and after they had committed funds said it would change the rules to undermine those projects accredited before 1 August.

That is pulling the plug on investment - and it is acting retrospectively.

(© Sally Barrett-Williams)

Can Government Keep the Fit Changes?

Posted by Sally Barrett-Williams of The Carbon Catalysts Group


There is a groundswell of hope that what happened in last week’s debate on solar PV in the House of Lords undermined government intention to change the Feed-in Tariff. The debate may be indicative – but the hope is premature.

In March government published a consultation which announced its intention to slash the Feed-in Tariff for solar PV by something like 70% as from 1 August. (In doing so it deviated from legislation that permits it to change the Tariff only once each year as from 1 April.) The consultation closed on 6 May.

It was then intended - undoubtedly after a period to allow government to take ‘full and proper account’ of responses made by consultees - to take the steps to enable the changes to take effect in law.

The changes themselves involve amending the Tariff table appended to the Electricity Supply Licences. (These Licences are a form of secondary legislation.)

Such changes may be made by one or other version of the negative resolution procedure. In this case, a draft of the proposed changes was laid before the House of Lords on 8 June and before the House of Commons on 9 June.

Each House then has 40 days (excluding any time Parliament is not sitting) to pass a resolution to reject the draft. If it doesn’t do so, consent will be assumed. All it will take is that one of the two Houses passes a negative resolution and the draft will fall by the wayside.

What happened in the House of Lords last week is that two motions of regret were tabled. The first referred to the dashing of legitimate expectations of solar businesses and the second to the negative impact the changes would have on the solar industry.

The Lords condemned the changes and Lord Whitty made very clear that the previous government had intended what this government has said is an unintended consequence of the scheme, namely, that the larger arrays, specifically those at 5MW, were to be most encouraged as being the most efficient.

Despite the Lords’ condemnation, the motions of regret were not passed: one was withdrawn, the other not moved.

The reason for the backtracking is purely constitutional: the House of Lords doesn’t vote against legislation that has been delegated to the executive, it leaves that to the House of Commons.

So what the House of Lords did, and all it did, was show its disapproval in clear terms and leave the matter to the Commons.

The Commons has not made much of a show. Ed Milliband has tabled an early day motion, calling for rejection of the changes. He has managed to attract 17 supporters—not a large number and not enough to defeat the government.

So what will happen? Lord Marland, speaking for the government, told the Lords that a number of directors and chief executives of renewables bodies had written to him to say that there were relatively few companies that would now be affected by a change in the decision of the government, that re-opening the decision would “cause lasting, and we believe irreparable, damage”, adding "We would urge you to oppose any attempts to overturn the Government's decision".

So while the Lords fume and stamp their feet, the renewables industry is fighting against itself and the House of Commons is lamely flailing. The only question seems to be when the changes will take effect. It currently seems likely that mid-autumn is the earliest.

(© Sally Barrett-Williams)

Funding Renewables

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

The joint problems of an impending energy gap and a demanding renewable energy target are resolved by investment. Government intends to facilitate that investment via a scheme ambitiously entitled Electricity Market Reform (EMR).

 Investments in renewables fell in 2010; following government tinkering with the feed-in tariff they surely fell this year, too. Nuclear power is something that will happen a decade away; it won’t deal with the energy gap. Carbon capture and storage is still only nascent technology. Coal plant is being squeezed out of the picture in the short term. In that context, reform of the electricity market to attract funding of renewable generation is urgent.

 EMR doesn’t achieve that. It doesn’t aim to reform the market, it aims only to adjust it. Nor does it provide any single measure that the finance or energy markets support. The most consistently repeated criticism, of all the measures in question, is that they introduce regulatory risk. It may be added that they also don’t achieve their purpose.

 The recent report of the Energy and Climate Change Select Committee on EMR is an impressive piece of work. It takes account of and reports a large range of views, incorporates them and draws conclusions involving them. Its main conclusions – those of its large array of witnesses - are pretty damning. There are four ‘pillars’ of EMR. Not one passes muster.

 Too-Narrow Subsidy The government’s preferred subsidy for low-carbon energy, a feed-in tariff with an associated contract for difference, will work for nuclear plant. But it won’t work for wind, or storage, or CCS, or small generators. Government needs to admit that this is an option for nuclear power and that something different is needed for other low-carbon generation.

Wrong Carbon Price Support CPS is to come into effect in 2013 – yet will have no impact on investment until 2018 so, until then, it is merely an energy tax and contributes nothing to resolution of the investment problem. After then, despite its cost, its usefulness will be limited since the cost of carbon is only a relatively small part of the price of electricity, too little to affect peaking plant and with not much effect on most other plant. Added to which the changeability of tax bands means that it’s politically risky. It’s at the wrong level at the wrong time and involves regulatory risk.

Pointless Emissions Performance Emission limits for coal plant are proposed by EMR. Since coal plant is already subject to stringent obligations, it’s hard to see what difference an EPS can make. And since it appears to allow for change, it creates fundamental uncertainty about government policy. The proposal is “pointless” and “half-baked”.

Premature Capacity Mechanism This proposal is vague. It is also premature since it won’t be needed until about 2020 when there is sufficient wind to create intermittency. And it is unclear that the intermittency issues cannot be dealt with by modifying the balancing mechanism, using interconnectors, energy efficiency, smart meters/grids, storage, demand-side management, etc.

 So we have a possible energy policy that is wrong, pointless, half-baked, beside the point – and which, the ECC report makes clear, fails to address a significant number of important issues. How are we to deal with that? How are developers to raise funds and financiers to fund projects? Go to the Energy & Utility Forum conference Funding Renewables on 16th June sponsored by us and find out (http://www.fundingrenewables.co.uk/)

(© Sally Barrett-Williams) 

Where's the Incentive in the Renewable Heat Incentive?

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

The Renewable Heat Incentive (RHI) has just been published. It is almost a year late, will come into effect 16 months later than planned and gives every sign of being an interim arrangement with substantial work being left until next year.

The RHI is the method by which Government has chosen to ensure delivery of 73TWh of renewable heat by 2020. This heat target is 12% of the overall renewable energy target. It is a seven-fold increase on 2009 (it was then 1.6%) and is a huge increase.

Phase 1 of the RHI (this year) only applies to non-domestic heat installations. In Phase 2 (next year onward) domestic heat installations will be included and, perhaps, other fuels and technologies. The ‘perhaps’ is the clue to why there are two phases: many questions remain unanswered. Will Government support landfill gas? Yes; when it’s worked out how to do it. Will it support solar thermal beyond 200KW? Perhaps, if after analysis the overall costs aren’t too high. Will it support air-source heat pumps? Perhaps, if testing shows them to be value for money. And so on and so on.

At heart it seems these questions are about cost. In its September report, the Committee on Climate Change noted the Government’s target of 12% heat as part of the overall 2020 target and, suggesting the costs were too high, that a drawback might be appropriate. Government rejects the drawback (it repeats the original 12% target) but shows all the signs of paring down any excess to least cost.

In general terms the RHI is intended to work in the same way as the Feed-in Tariff and the differences between this year and next lie in additions to what has already been established:

• a subsidy is paid per unit of renewable heat ‘generated’ against a published tariff;
• the tariff endures for 20 years with an annual RPI uplift;
• the regulator approves an installation and confirms its output, so enabling payment to be made on a quarterly basis (with the difference that payments are made to owners and not via suppliers or agents).

So far, the FIT has been successful. If the RHI is to deliver against its own targets, it needs to be as successful as the FIT before Government decided to limit its most successful parts.

Will it deliver? In principle the view seems to be that it will, surely, if the tariffs are set at the right level. But the RHI scheme is thin. Tariff levels are to be kept to the minimum and will provide compensation only for the additional costs of a technology over, primarily, gas heating and not for the full cost of equipment or fuel. The scheme thus incentivises small-scale decisions: where a heat installation was already due to be replaced, the RHI will incentivise its replacement by a renewable technology. What it won’t do is provide a reason for replacing an installation that is perfectly adequate save for its technology.

The RHI also runs foul of another investment hurdle - regulatory certainty. If there is any chance that what has happened to the FIT scheme will happen to the RHI scheme, investment will be hesitant, at best. Yet intervention and chop and change is built into the model. In addition to reviews every four years, which are to be expected, there is to be provision for ‘early’ reviews and degression, i.e., intervention by Government to set tariff levels lower if there is a greater take-up than expected.

The RHI, then, is a scheme without attractive incentives and with regulatory risk. Wouldn’t one expect Government to expect it to fail?

(© Sally Barrett-Williams)

EMR Capacity Mechanism

Posted by Rick Hemmings of The Carbon Catalysts Group

Fundamental reform of the electricity-market has four separate parts – carbon price support, feed-in tariff, emissions performance standard and a capacity mechanism. We will be producing information about each of them over the following weeks, but we begin with a presentation on one of them, the capacity mechanism - click here.

(© Rick Hemmings)

Fundamental Market Reform?

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

Fundamental reform of the electricity market has been promised for some time. In view of changes already proposed, it has always been puzzling what fundamental reform could possibly amount to. Now we know - both DECC and the Treasury have published consultation papers setting out the details.

A NEW FOSSIL FUEL LEVY will ‘top up’ the costs of EU ETS Allowances (ERUs) incrementally from implementation until a long-term carbon price is reached at a level that has yet to be determined. The intention is to increase the costs of fossil-fuel generation, making other forms of generation comparatively more attractive.

If the cost of ERUs rises, as expected, the level of fossil-fuel top up needed will be lower. But there is a very large gap between ERU prices now and where nuclear investors say they must be. The UK-directed ‘hit’ for its fossil-fuel plants will be substantive.

(Chris Huhne periodically claims that the fossil fuel levy is not a subsidy for nuclear plant because it benefits all renewable plant and creates a level playing field. In saying this, he overlooks the fact that the UK has specifically directed subsidies for renewable plant which are intended to be strengthened by this government and not removed to be replaced by this levy.)

The levy is planned to take effect in April 2013.

A NEW EMISSIONS PERFORMANCE STANDARD will underscore the hit on coal plant already made by the new fossil fuel levy. In addition to the levy, it is proposed to impose a total (and presumably steadily decreasing) limit on carbon emissions by coal plant.

A NEW FEED-IN TARIFF will replace the Renewables Obligation. The proposal is not surprising: we have long known that FIT schemes are far more effective than the RO.

The government’s preference is for a FIT combined with a contract for differences. The generator sells at market price and receives as subsidy the difference between that price and a pre-determined subsidy rate.

There are ‘design’ difficulties with this option so two other forms of FIT are outlined. The obvious safe choice is the form of the FIT currently in place.

A NEW LOW-CARBON OBLIGATION will be imposed on suppliers. This effectively extends the “Renewables Obligation to nuclear and CCS”. To ensure targets are reached, the obligation will have to involve some kind of banding to incentive renewable (as against nuclear) plant.

CAPACITY PAYMENTS will be introduced to incentive construction of flexible reserve generation. So central planning is to take over from the market. The level of generation margin will, government believes, not be sufficient if left to the market, so it intends to introduce rules to ensure that there is as much generation margin as it decides it wants.

Questions about the form of the capacity payment (who gets it, for what and who administers it) are apparently up for grabs. But I don’t expect many will take bets against National Grid being the scheme’s henchman.

Final DECC proposals will be issued in a White Paper late next spring; and changes will be implemented before the end of this Parliament.

Much of this, including the Treasury’s levy proposals, is very like what was on the table during the last government. The real departures from that policy are replacement of the RO by a FIT (something the last government should have contemplated and which it simply failed to do) and centrally controlling – and maintaining – generation capacity margin.

This last may yet prove to be fundamental by virtue of knock-on effects on the pricing that emerges from the balancing mechanism and on market dynamics.

(© Sally Barrett-Williams)

Slimming FITs and Stealth Taxes

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

The Comprehensive Spending Review has been and gone. The upshot was to unsettle renewables funders and developers alike and, without consultation, to introduce a new energy tax.

The change with the most immediate consequences is the restriction of the Feed-in Tariff (the FIT). While the restrictions are not yet been in effect, we have a pretty clear picture of what will happen. We know that:

• the FIT will be reduced by 10% in a review of the scheme in 2013
• any “higher than expected” deployment of FIT-supported technology before that review will trigger an earlier review (HMG will “shortly” say what the trigger is to be)
• the rules on field arrays will change: government has declared that field arrays should "not be allowed to distort the market" – which implies that we should expect change soon
• government intends to encourage the FIT to roll out across the country

Despite all that we know about government intentions for the FIT, we don’t know two key things.

First: we don’t know if other forms of PV will be left alone until the 2013 review. This particular uncertainty should be dealt with by government urgently.

Second: we don’t know whether the 2013 review and its envisaged 10% efficiency savings can be met by removing field arrays from subsidy at an earlier stage. If they can’t, it would be helpful to know if all forms of installation are under threat.

Market reactions to this uncertainty are wholly predictable. Investment for some projects has dried up and that for others is available only in a rapidly-closing window. Development of FIT-supported schemes will stall altogether unless the government takes prompt steps to remove the uncertainties.

The other main Spending Review announcement affecting the energy market was that the much vaunted energy emissions trading scheme, the Carbon Reduction Commitment (CRC) Scheme, had been brought to an end to be replaced by a tax with the same name.

It’s hard to know what to think about this extraordinary, last-minute volte face. Large numbers of organisations have spent months and not insignificant resources gearing up for a trading scheme. This was to be a trading scheme in which companies bought allowances, made efficiency improvements and traded on the market.

CRC companies were also to be ranked into a league table. Those achieving positions at the top end would recoup all the income government obtained from selling allowances.

It won’t now happen. There won’t be tradeable benefits or profits to be derived from having a better profile than the next company. The government has said that it will keep all the proceeds of allowances sales. It hasn’t yet got round to correctly describing this as an energy tax.

The justification for this is that the CRC scheme is too complex.

Read that again: the reason for doing this is that the CRC scheme is too complex. So government officials and ministers have assiduously repeated.

Despite this justification for changing the rules of the CRC so expensively and so late and despite the insistence that the scheme must be made much simpler, the proposed reform will keep those very features that made it so complex: the league table, the different matrices, the calculations of a leaguetable position against the matrices.

The absurdity of this contradiction (absurd because so very blatant) exposes that the reasons given for changing the incentives of the CRC scheme are not the reasons for doing so at all. It also exposes that the changes were made and the explanation given at a time when no-one had time to come up with anything better.

(© Sally Barrett-Williams)

Squeezing FITs

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

The Feed-in Tariff is a new scheme designed to incentivise individuals and companies to become local electricity generators. The newsagent round the corner, the out-of-town supermarket and the houses in the close will all be capable of generating electricity for their own use and of selling the excess into the grid. For this they will be paid handsomely. They will get:

• the FIT for electricity they generate, whether they use it or not;
• an additional fee for electricity that goes into the grid (or that is deemed to go into the grid); and
• free electricity.

The downside is the high capital costs of installing the generation equipment. Here the installers step in and do it for free. They fund, design, install and run the technology and earn the subsidies while the house, the supermarket and the shop owner get the electricity the equipment generates for free.

Government is keen on this arrangement, even though benefits don’t all go to mini-generators.

• They positively want to create the conditions for a ‘smart’ domestic-level grid (doubtless over time we and they will come to know precisely what that means).
• They believe that by this means energy security risk can be spread, partly as a result of energy diversification and partly as a result of the nature of that diversification.
• They foresee/hope that it will give rise to an increase in renewable energy output and help us reach our 2020 and 2050 targets.
• Land energy suppliers with a 50,000+ client base (the Big Six) foot the bill for the entire scheme; government pays nothing.

But with the Comprehensive Spending Review all expenditure, including FITs, is up for review.

Why should government review a subsidy it isn’t paying for? The official position is that any government measure that increases consumer expenditure is open for review.

But there is more to it than that. The government has been committing itself to the heat incentive over the last weeks. It is still unclear how it’s to be funded—particularly as we expect it won’t be by government.

Add to that the need to fund measures in the impending Energy Bill and White Paper. The costs of these policies will be significant. If government won’t be paying, there seems little option but to slim down the financial obligations of the Big Six under the FITs to free them up for a wider financial remit.

Slimming the FITs won’t, surely, mean ending it. We know it will remain in some form: the government said so in spades at the party conference, although refusing to be drawn on detail.

If we take it for granted that FITs is up for review and that there will, perhaps, be some drawing back, is there any way to determine the likely form of the revamped FITs?

There can be no certainty, but government could achieve most of the objectives listed above by cutting out high cost projects. So, for example, the PV tariff could end at standalone schemes. That for hydro could end at the 2MW level, with wind ending at 1.5MW.

Other ways of dealing with the FITs are contentious—and could set back investment confidence for the foreseeable future. However the government deals with this, it must ensure the investment community stays on side.

The grapevine says we won’t know the shape of the FITs by 20 October but that we will then know – in the announcement of the Comprehensive Spending Review – when and how decisions will be taken. So either there’s room for negotiation with government or what it aims to do is complex. On its last showing with a complex scheme, the renewable heat incentive, that probably means there’s room for negotiation.

(© Sally Barrett-Williams)

What’s Happened to the Renewable Heat Incentive?

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

‘Last year, the latest Public Sector Net Borrowing forecast was the largest in Britain's peacetime history... According to the IMF, the UK has the highest budget deficit in the G7 and G20, and its latest forecasts project that public sector debt will double between 2007 and 2015, to around 90% of GDP’

This was George Osborne’s preamble to his announcement of the savage cuts to come from the Comprehensive Spending Review (CSR). All, not merely new, expenditure is to be critically assessed. It must be “essential”, provide “substantial economic value”, “target those in most need”, and be cost-effective to have any chance of coming from government funds.

How, in all this, does the Renewable Heat Incentive (RHI) fare?

Although the RHI was due to come into effect next April, there is no sign of any decision by government and everyone is asking whether the RHI will actually happen.

The reason it didn’t happen earlier is the Energy Act 2008 and DECC’s failure (yet again) to do its homework.

The Act provided for two new small-scale renewable-generation tariffs - the feed-in tariff for electricity (the FIT) and the RHI for heat. These new tariffs were to be funded differently. The FIT was to be funded by the big electricity suppliers and the RHI was to be funded either by the fossil-fuel generators or out of general taxation.

After the Act came into effect, the fossil-fuel generators persuaded government that getting them to pay was not an option – probably because these generators are also the big suppliers so already paying under the FIT.

The government also decided to reconsider funding the RHI from taxation.

We have a new government and a tough CSR. Will the RHI make it?

Before we get to that question it’s worth noting that each government department will appear before the Star Chamber to defend its spending – all its spending - against a list of objectives. Once that department completes its defence, it will join the Star Chamber to put other departments under the same scrutiny. New spending will be hard to get through this process.

Any minister with new spending in view would do well to try and place the government in the position in which what he wants seems to be the very thing that government has committed itself to and from which it cannot resile.

That is exactly what Huhne has been doing, with a little help from his friends.

Before the Select Committee last week he declared that, though subject to the CSR, he saw “heat as essential to meeting the 15 per cent [renewables] targets by 2020”.

A recent addendum to the RHI page on the DECC website reads: “This Government is fully committed to taking action on renewable heat; this is a crucial part of ensuring we meet our renewables targets ... The Government … will set out detailed proposals … through the Spending Review.”

The new annual report by the Climate Change Committee asserts: “A significant increase in the share of renewable heat from current very low levels (around 1.6% in 2009) is necessary to meet future carbon budgets.” It adds that a financial mechanism is needed to ensure this happens.

David Cameron, proclaimed the intention for his administration to be “the greenest government ever".

All these stated aims, intentions, desire should be put against the background of the 2010 Budget – it mentioned many features of climate change policies and did so in some detail, but the RHI got no mention.

What this all tells us, I think, is that there will probably be an RHI in some form or another but that its funding mechanism is not yet known and so the tariff levels we think we know are not certain.

(© Sally Barrett-Williams)

Wrong-Footing the CRC

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

The Carbon Reduction Commitment or CRC came into effect this April and appears to have taken many by surprise. One newspaper suggested that as many as 43% of potential CRC participants had never heard of it.

The timetable for the scheme is such that those organisations claiming ignorance will fail to register by the end of September. The cost of that failure will be £5,000 + £500 daily thereafter.

Did those ignorant organisations simply have the wrong procedures in place? DECC published its proposals, consulted CRC stakeholders, held workshops—and did so over an appropriately lengthy time. So surely, one might think, all those organisations that were to be affected, bar the wilful, would have known or, indeed, did know.

DECC’s record doesn’t stand it in good stead here. Its failures over the last year are a grim reminder of how badly it can get things wrong.

Remember how successfully it froze off investment in the biomass generation market by taking steps to support it?

Remember how inept was its dealing with the fallout from that cockup over the following months?

In the case of the 43% of organisations that should but that purportedly don’t know about the CRC scheme, DECC’s record means that one would really need to be convinced that it had identified stakeholders and convinced it made known to them the need to engage and the consequences of failure.

To compound the doubt about DECC’s competence is a failure of some substance. Remember that no organisation affected by the CRC scheme is obliged to do anything until 30 September 2010, so a failure of substance at this point is a cause for concern.

There is something called the “Early Action Metric”, which is a calculation of benefits to be obtained from taking early action to reduce carbon emissions. One of the early actions involved is the installation of Automatic Meter Reading. The belief is that AMR will provide information such as to enable emissions to be driven down before any further steps need to be taken.

As originally drafted, AMR was something to be installed to deal with emissions measured from 31 March 2011.

Organisations were therefore entitled to believe that they would obtain maximum benefit from early action by introducing AMR by April 2011.

But they were wrong! The early action in question actually deals with measured throughputs of energy - and to maximally benefit from it AMR had to be in place and starting to measure throughput on the day the scheme started, April 2010, a full year earlier.

However the mistake got made, it was the fault of no-one other than DECC. There was, on the part of CRC-affected organisations, no failed interpretation, no sloppy reading, just their adherence to DECC’s CRC Energy Efficiency Scheme User Guide. This was the guide that was to be the CRC implementation bible.

DECC corrected that mistake in a document to the Guide it called the Corrigendum. The correction is so inapt that only a further note on the DECC website makes its intent plain.

Further, DECC corrected the mistake on 28 May 2010, two months after the scheme started and too late for any scheme participant to benefit fully from early action. So any organisation following the guide would have been incapable of benefitting maximally from early action.

That is DECC’s record for the CRC scheme and there is no reason to suppose there may not be other, equally significant, errors. It’s an unenviable record for a scheme that has barely begun – and one that should lead DECC to consider moving the start date forward to April 2011.

(© Sally Barrett-Williams)

Filling the Energy Gap

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

We’ve known about the impending energy gap for some considerable time now. It’s not getting closed. Why not?

One reason is that not enough bankable renewable energy projects are being built. Our renewable energy capacity is increasing, but oh, so slowly. In any event, there are no signs there could be sufficient renewable output in the medium term to be anything other than an addendum to the main show.

Another reason is that new-build nuclear is slipping further into the future as the big issues take time to get sorted. A carbon floor is yet to be priced and put in place. A decommissioning cost has to be agreed in principle, determined and capped. And planning has now been thrown back by the Tories and will take years longer than was once expected.

There are peripheral reasons, too. Yes, there’s carbon capture and storage – but not now, and not in any clearly predictable future. Yes, there’s new-build gas - but there is a real discomfort with that option and a proposal is still on the Treasury’s table to penalise anything new-build with any carbon at all.

So what will happen? Undoubtedly, we will do as others and backtrack on mothballing valuable resources. In Germany the nuclear fleet due to close in 2022 will now not close until after 2050. Spain has just begun a review of its entire energy portfolio - mostly coal or gas. Other EU States are also reconsidering - notably Eastern Europe. Much of this is to do with coal.

As for the UK, we have lots of coal plant and it is predictable that the 13GW to be mothballed in 2016 will remain in service if closure means cuts in output. Right now, closure does mean cuts in output. And right now government should be planning how to backtrack on mothballing commitments and when to do so.

Some say it shouldn’t be done, but either fail to say what should be done or demonstrate a singular lack of grip on the state of the technology, on the workings of the finance markets and on how economies work.

Others say it can’t be done because we’ve signed up to two EU directives and we’re bound by the EU Treaty. Both those who say we shouldn’t retreat from mothballing and those who say we can’t might find the tale of the Irish oil refinery salutary:

The Irish government bought a non-commercial oil refinery. To enable it to survive financially, the government forced oil importers to buy its high-priced products.

A group of oil importers clubbed together to ‘sue’ their government, claiming that the obligation was an import obstacle and so illegal under EU law.

The case went to the European Court of Justice, which agreed that the Irish government was creating important obstacles.

But it went on to say that although such import obstacles were often illegal, in this case they could be justified.

It is the ground of justification that is important. The Irish government argued the import restriction was justifiable on grounds of “public security”. The Court not only agreed, it argued in support:

“[oil] products … are of fundamental importance for a country's existence since not only its economy but … its institutions, its essential public services and even the survival of its inhabitants depend upon them. An interruption of supplies … with the resultant dangers for the country's existence, could therefore seriously affect the public security that [states are allowed to protect]”.

The ECJ faced with a refusal to mothball by the UK could not but argue the same need for the government to take those steps it is permitted to take to protect its interests. And faced with those who say it shouldn’t be done, it would repeat its claim that the survival of the State depends upon it.

Delivering Nuclear Power

Posted by Sally Barrett-Williams of The Carbon Catalysts Group

In March the Tories set out their energy policy in Rebuilding Security. Seven weeks later, the Tories and Lib Dems published something they described as a ‘joint’ policy position.

Despite the implication that Tory policy was being leavened by Lib Dem policy, there appeared to be no substantive difference between the Tory’s original policy document and the later ‘joint’ document – except the original was more radically green.

What is different is the agreed voting arrangements for nuclear power. The Lib Dems have agreed that they don’t get to vote on the issue, although they can oppose it as much as they wish. If Nick Clegg can persuade the members of his party to follow through on this commitment and waive their rights to vote on an issue that many oppose, there will be many eaten hats.

Of course, the Lib Dems may now believe nuclear power simply won’t happen. If so, they aren’t wasting their votes. That certainly appears to be what some of them believe. Huhne complacently announced that in his view no new nuclear plant could be built without public subsidy–and no subsidy would be forthcoming from his regime. Ergo, one assumes, there will be no new nuclear plant.

When he said this, he had signed on to a ‘joint’ energy policy providing for a floor price for carbon. Did he understand it? One is tempted to think he did not.

The Climate Change Levy is a tax on energy usage. That tax will be abolished and a new tax with the same name will be imposed on carbon emissions. The new tax will operate alongside Emissions Trading Allowances. When the value of these Allowances falls below some figure determined by the Treasury - say, €30 - the new tax will be paid by the carbon emitter (the generator) but if it rises above €30, no tax is payable. This is tantamount to ensuring that the value of carbon credits is never lower than €30.

Is the tax a subsidy? True, cash is not being collected by government and given directly to new nuclear plant. What is happening is that cash is being collected by government directly from fossil fuel plant, thereby creating a bankable value for nuclear plant. Not a subsidy? It’s a matter of nuance: none of us knows whether Huhne knows this or not.

What have the Lib Dems been doing for the last few months, so far as energy policy is concerned? The answer is they have been doing and saying nothing that matters very much. Their policy was that of a party that will never face the big decisions. It had its negatives–they didn’t want nuclear power. It had its wishful-thinking positives - they were aiming to “drive a massive programme of investment in renewable energy sources such as wind, wave and solar”. It didn’t seem to have anything else.

Both the last and the current government went through a phase of such pious hopes. Both some time ago conceded defeat in light of the failure of technology to deliver what was wished of it and they added nuclear power to the low-carbon mix. They added it for all the right reasons: we need more power; we need to reduce our emissions; we need to deal with fuel poverty.

The only reason the Lib Dems have not yet reached the same position is that they have not, until now, had to get to grips with the reality of power. Huhne is in the hot seat. Is he up to the job?

The answer isn’t something we can yet know. But if he really believes the agreement between the parties to put in place a floor price for carbon doesn’t makes new nuclear a probability, he is going to be no more than the titular holder of his post.

Saying Yes But Meaning No

We do want biomass CHP generation don’t we?

And government really does mean it when it says that its 2010 CHP targets are for 10,000 MW CHP capacity and that 15% of energy used by it will come from CHP?

If the answer to both those questions is yes, it’s hard to see why up to 5GW of biomass development in course at the end of last year was frozen by government and why any development of new projects is to be seriously limited by it for the foreseeable future.

In December DECC announced that support for biomass plants would not be grandfathered – so the biomass plant you build now might not get the same/any support post-2013. That news pulled the rug from under projects which were to start to generate post-April 2013.

It appeared to be news to DECC that changing investment rules and removing investment props undermines the market. Extraordinary though it may seem, the DECC officials who have been in place for some time seem simply not to have known the basic rules of markets, investments and government support, despite that being their main job in life.

With a cock-up on that scale one expects immediate action. What did we get? Nearly two weeks later Lord Hunt announced that he would make an announcement at a future date, but not now. Then just over two months later we were told that an announcement would be made later, but not now. Why the delay?

There are two possible answers. The ‘good’ answer is the one that makes us think government is devious and investors can’t trust it but it nonetheless knows what it’s doing. The ‘bad’ answer is that they’re out of their depth. It isn’t simple deciding which it is.

DECC said that the 2010 Renewables Order (the Order that dealt with the biomass issue) had already gone to the Joint Committee on Statutory Instruments and they couldn’t now change things until the next Renewables Order in April 2011. That is a ‘good answer’: it is clearly nonsense, so must be designed to do no more than deflect us all. These people are irritating, yes, but not stupid.

But there is now a consultation paper out and in it one is really hard pressed to find any reason for the problem except the inability to sort out how to allocate costs and subsidies so the two match up. It appears that DECC decided not to grandfather biomass plant “precisely” because it couldn’t manage to fathom a scheme to ensure that the biomass plants with cheaper feedstock got less support than the biomass plants with more expensive feedstock or that as feedstock changed, prices changed.

Why should that matter? According to DECC, grandfathering could result in future market distortion if bands were changed for new entrants. On the basis of such future perhapses, possibilities and mights, DECC has thrown in the towel and decided that it can only deal with non-fuel costs as the basis for the RO allocation – and it is asking us how that will work.
Why not look at what other countries do so much more successfully than us? Why not copy the rules in Germany where they will meet their targets, even if we won’t? Why not do anything other than pull the plug on current projects?

It’s worse than that. For other kinds of biomass – waste from energy and anaerobic digestion – government is to defer a decision until the next review of the Renewables Obligation. There is no possible glimmer of light here for the future.

The message has to be that although government says it wants biomass, it doesn’t.

But if that’s wrong, they’re going about it in the wrong way and I will arrange that they be given free entry to the conference run by the Energy & Utility Forum on 1st June which tells them what funders and developers need: www.fundingrenewables.co.uk/ and I will go out of my way to ensure that the investment community engages with them.

Sally Barrett-Williams
Partner - The Carbon Catalysts Group
Chairman - Energy & Utility Forum

(© Sally Barrett-Williams)

The Shape of Things To Come

Without substantial intervention in the energy market, the UK will miss its emissions targets and will find itself with insufficient power.

That is agreed by Government, the Opposition and the regulator. But they have different views about the cause and extent of the problems. It’s no surprise, then, that they disagree about the way forward. Each has set out the options recent policy announcements.

The regulator kicked off with Project Discovery. This sets out four 2020 outturn possibilities, which presuppose two economic recovery scenarios, slow and fast with, in each case, high investment or low investment in ‘green’ infrastructure.

It then outlines five options to overcome the inadequacy outputs of these scenarios. The options range from a central energy buyer to a mix and match of a carbon floor, a centralised renewables market, new purchase and sale obligations, etc. In other words, all the options discussed over previous months make their appearance in the mix of policies for the way forward.

What did Ofgem intend by this? It doesn’t have a policy remit (and has intensely irritated its current and potential future political masters in publishing.) Was it aiming to narrow discussion about the range of possibilities?

If so, it didn’t work. The Treasury followed behind with its Energy Market Assessment. This dismisses reliance on a carbon floor and dismisses a central buyer for all energy outputs. It insists focus must be restricted to:

• paying low-carbon generators more;
• ‘penalising’ high carbon generation;
• paying low-carbon generators a fixed amount.

Having read this document, one’s response is why bother? It has no argument and defers anything substantive to an autumn consultation. The only effect is to show that Government doesn’t yet have a policy on market reform.

The Tories, by contrast, are hugely ambitious — over-ambitious, perhaps? They have published a twelve-point policy plan called Rebuilding Security. The plans fall into three parts: substantial market reform, administration and tidying up. The heart of change, the main market-reform proposals, are:

• requiring electricity suppliers to buy capacity;
• requiring gas suppliers to have storage, contracted demand-side response and (contrary to the trend in European competition decisions) long-term contracts;
• implementing a long-term carbon floor price via the CCL;
• building an offshore grid, with associated marine park facilities;
• mandating a national network of recharging points for electric cars;
• limiting Ofgem’s powers and taking policy matters back into government (contrary to the decisions taken by the European Energy Council).

These policy outlines are quite different, with the Tories being the most interventionist.

But discouragingly, there is a huge similarity between the proposals.

• Ofgem’s options and consultations are irrelevant: it has no powers to be dabbling in policy and no government will give its options any credence.
• The Government has, as yet, only nascent policies.
• The Tories have policies which involve a disregard for EU powers and EU decisions that one cannot contemplate any government following through.

A senior Labour parliamentarian said we don’t have policies, we just muddle through. So far there are no signs that is changing.

(© Sally Barrett-Williams)

How to get it really wrong

In January DECC announced that it was changing the Renewables Obligation rules for biomass plants and they would now no longer be grandfathered.

Putting that at its commercial bottom-line clearest, what government told us that day was that the biomass plant you build now might or might not get 1.5 ROCs per MWh after 2013.

The news pulled the rug from under projects nearing the end of their development period that were looking for finance and would start to generate after April 2013. And it pulled the rug utterly obviously, predictably and as certainly as day follows night. Governments do not make changes of this kind in this kind of way. Never. Ever. They know that doing so freezes investment and brings development to a halt.

So everyone asked, shocked and appalled, for an explanation in meetings they demanded with DECC. A number of things emerged from those meetings.

First, and most worrying for the investment community, was the discovery that it was news to DECC that changing investment rules and removing investment props undermines the market. Extraordinary though it may seem, the DECC officials who have been in place for some time and its panoply of energy politicians seem simply not to have known the basic rules of markets, investments and government support, despite that being their main job in life.

A second thing that emerged from the meetings was that DECC had changed the rules because it couldn’t manage to work out a simple a priori means of distinguishing between one kind of biomass and another. It couldn’t fathom a scheme to ensure that the cheaper sorts of biomass plants got less support than the more expensive kinds of biomass plants. Again, it is worrying that officials who have been in post for so long can so signally fail to understand how to do these things. They might at least have looked at Germany, which managed to do precisely that in its Renewable Energy Sources Act some considerable time ago.

With a cock-up on that scale one expects immediate action. What did we get? Nearly two weeks after developers and funders explained to DECC the momentous consequences of its ill-considered decision, Lord Hunt announced that he would make an announcement sometime later, (though no later than eight weeks later). Why the delay?

The answer is the third thing to emerge from the January meetings: any clearing up of the mess is not intended to happen soon. The 2010 Renewables Order – the Order by which this change is to be made – has already gone to the Joint Committee on Statutory Instruments. The DECC officials want to leave the matter to be dealt with until they get to dealing with the next Renewables Order in April 2011.

Just pause for a moment to consider the costs of such delay. Projects that might have come on stream after 2013 are stalled and will remain stalled until legislation (not Lord Hunt’s possible future warm words) deals with the issue in April 2011.

In that time projects will fold for different reasons–options that lapse, costs that mount beyond a fundable bar, contracts that don’t get taken up or which are renewed only at significantly higher cost. That delay will impact our reaching our renewables targets. It will also affect total overall costs since we know that new schemes are more expensive than older schemes.

The simple solution is to put before Parliament an order amending the erroneous order now. Anything less suggests that someone’s face-saving is more important than UK energy policy. So it may be to whoever is dragging their feet – but good order in government requires that corporate decisions rather than individual mistakes take precedence.
Isn’t it reasonable to assume good order will prevail?

(© Sally Barrett-Williams)

It's not a treaty Guv, honest!

It’s the start of a new year and, in Europe, the start of a new era. The Lisbon Treaty - the Treaty that isn’t a treaty but just ‘tidies up’ the administration - is now in effect.

One consequence of the new ‘administrative tidying’ non-treaty Treaty is that it has created the European Union (or the “Union” as it is called) in place of the “Community” it replaces. The new Union is independent of the countries that belong to it. So we can now talk about the EU and the Member States and they are all different entities.

We will see, over the next years, just how major and significant a change that little bit of ‘administrative tidying’ turns out to be.

Another consequence of the Lisbon Treaty is that the brand new Union and the Member States now have a curious kind of joint responsibility for a number of things. Energy is among them.

It’s hard to describe in brief what this joint responsibility amounts to since it’s expressed in Eurospeke as “a spirit of solidarity”. If anyone thinks there’s anything discretionary about that spirit of solidarity, just consider what its opposite would be: ‘acting alone’, ‘acting without regard to membership of the Union’, etc. It would, in effect, run counter to the Treaty (and the non-treaty Treaty) and the Union.

No; there is nothing discretionary about the spirit of solidarity. One might as well call it as it is and say there are now joint obligations imposed on indi-vidual (and joint) Member States and also on the new entity, the Union.

In the field of energy, our basic joint obligations are listed as:

• to create a Union energy market; 
• to ensure security of supply for Member States and the Union; 
• to promote energy saving and re-newable energy; 
• and to bring about interconnection of all energy networks.

These have always been our obligations. That is, they have been the obligations of France or the UK or Italy or Spain, and so on to ensure that France, or the UK or Italy or Spain, etc., do these things and aim to achieve these objectives. But that has changed. We now have joint obligations and the Union has the same obligations – which means that we must act jointly and the Union must act.

There is one significant additional change in the ‘administrative tidying’ of European energy obligations. Before the non-treaty Treaty came into effect the way in which each Member State carried out these obligations was left to each of them because they, and not other Member States (and not an administrative entity) had what is described as greater ‘competence’ in dealing with their own local circumstances.

That is no longer so: our competence to decide how we will implement the provisions of any directive is no longer a separate competence but is a competence only capable of being exercised in collaboration with the other Member States and the Union. We now share a competence in energy matters, which clearly means no Member State may act alone. But more: that competence cannot be exercised by a Member State if the Union exercises its competence first.

What this means is a quite extraordinary reversal of powers: the UK (a Member State) could not decide how to implement energy provisions emanating from the Union if the Union had decided how to implement the provisions first.

So much for an administrative-tidying no-treaty Treaty. And so much for a government that either decided not to discuss the Treaty with the electorate or which didn’t have a grip on what was happening. The amateurism of the energy brief over the last few years suggests that it’s less stitch up and more cock up.

(© Sally Barrett-Williams)

Price Cap, Price Control and Income Distribution: The New Energy Bill

The 2009-2010 Energy Bill contains some of the things we knew it would, such as a tax on suppliers to pay for CCS demonstration projects.

It also contains price control powers that are fundamentally anti-market, permit a high degree of government control and go far beyond what we might expect from any government, let alone one needing large-scale investment by energy companies:

• suppliers will be obliged to fund the government’s various fuel poverty schemes in ways, amounts and times government dictates; 
• government will be able to amend supply prices ; 
• and certain generator profits can be prevented.

The powers sought really are quite as extraordinary as this itemisation indicates they may be.

Fuel Poverty Schemes

Suppliers voluntarily participate in the current fuel poverty scheme and provide £150m to those who spend 10%+ of their income on energy.

New schemes will oblige suppliers to participate. These schemes will be flexible about the amount of any benefit (there isn’t a cap on scheme values), its form and how it is provided. The government is looking forward awarding pretty substantial price rebates to consumers.

A particular option foreseen is a scheme in which the fuel poor pay a lower price than others, so others are forced to subsidise them.

This amounts to the right to tax the energy consumer by whatever amount seems to government to be desirable. Further, the tax trigger is fuel poverty, whose level is raised or lowered by government actions.

Price Setting

The second provision involves a dif-ferent form of price setting, activated where prices to consumers are at different levels. Where a supplier charges non-discriminatory different prices to end-users - because some customers buy electricity, some gas and some both gas and electricity and the prices for each are different - the government may set aside the prices and impose its own.

This amounts to the power for government to impose its own view of the right price.

Preventing Excessive Profits

The third form of price control is aimed at preventing generators earning ‘excessive benefits’. When will this happen? When generators choose which plant to run to achieve profits from either bids or offers or make bids to benefit from being a sole provider in an export constraint situation.

In such a circumstance, new licence conditions will be introduced to prohibit this form of bid.

What is an excessive benefit here? We haven’t been told; it has been left for government to determine.

One obvious question to ask at this juncture is whether there is any prospect that this Bill, which has just had its second reading, will become law. There are fifteen pieces of legislation to be dealt with before the latest date Parliament can dissolve (22 May). Of these, three are carried over from the last session and must be dealt with; six others have more obvious electoral importance and there are at most 71 days to achieve this.

Although it cannot be probable the Bill will become law, it is possible.

There are signs the Tories will retain legislation providing them with fiscal tools (they indicate that law they would not introduce they will use because it’s there).

The contradictory nature of the Bill and its investment unintelligence should not lead us to be complacent and assume it could not become law. It could; and it could be hard to get rid of.

(© Sally Barrett-Williams)

Locking the stable door

The likely next government has, it appears, said it will cut Ofgem down to size and repatriate its strategic powers. A announcement of the details is expected some time before Copenhagen (7-18 December).
The new role appears to be an odd combination of ‘pure’ market regulator and consumer protection body. What makes the latter especially odd is that various consumer bodies have only recently been collapsed into one and taking the energy function out of that big brand new consumer body and plugging it back into Ofgem has no obvious rationale. (The Tories do know these bodies have merged, don’t they?)
So far as the ‘pure economic regulator’ bit of the new role is concerned, it seems clear where one might want the slimming regime to focus. Right now Ofgem has on its non-core agenda: Analysing the markets’ capacity to cope with the credit crisis and its reliance on imported gas; Changing the industry rule-making processes to unseat what it calls “vested interests”; Running a new, expensive, unwanted and widely derided offshore transmission regime; Pushing for smart meters; Contributing to “the European energy scene”; and Advising “government how to meet its 2020 target and, along the way, how to mitigate fuel poverty.
Since all this work essentially involves policy or its addendum, it should all be expected to go back to government if Ofgem were restricted to what was, once upon a time, its day job. Is there any chance that will happen?
A fly in the ointment of any retrenchment is the law. Late last August new European Directives came into effect, forcing Member States to arm their energy regulators with a range of powers.
These powers include, predictably, opaquely and vaguely, whatever may be needed to “promote a competitive, secure and environmentally sustainable internal market in electricity’”. If one took that phrase to court to argue that the regulator did or didn’t have the relevant powers, it’s hard to know what the outcome might be. To that extent it is broadly meaningless and is to be understood as just a handwave.
Much more meaningfully, however, the regulators are to have powers to monitor investment in generation capacity and they are to have powers to promote system adequacy. These are substantive powers that go way beyond ‘pure economic regulation’, no matter how broadly one construes the phrase - and several of the items on the regulator’s non-core agenda listed earlier clearly aim at these outcomes. So even though these were once ‘extra-curricular’ activities, they are extra-curricular no more.
Now is not the time to be complaining that with this massively political agenda the regulator is stretching the boundaries of its powers by straying into policy matters. It’s too late; the horse of pure economic loss bolted some time ago and the Tories will have a hard time getting it back in its stable.
That doesn’t mean everything on Ofgem’s agenda must stay. The new government should repeal, immediately, the bizarre, anti-competitive offshore transmission regime that began life this year. And Ofgem should be prohibited from having any kind of role in the market. It should also be pushed back from the more clearly political of its activities.
But trimming the regulator back still leaves it with wider powers than anyone expected. That is something, with whatever bad grace, we have to accept – while blaming our politicians that they have left us with regulation by a body that is substantially free of government direction but is subject to direction by the European Commission. It is a regulatory regime of a kind no-one could possibly have wanted. Although the Tories cannot do what they say they will do, what they can do – what they must do – is devise a regime to ensure that issues of this kind are brought before its own constituents to enable them a say in the matter before they become enshrined in law.


(© Sally Barrett-Williams)