UK Energy Bill Reforms Triple Green Subsidies

UK Energy Bill Reforms Triple Green Subsidies

By Peter C Glover

There’s a battle going on at the heart of the British coalition government. It reflects a fundamentally different approach to energy and climate change. The emerging UK policy may be the most mature in Europe, worth studying because it may reflect things to come elsewhere and they are not pretty.

The policy is an approach pitting the ideologically-driven ‘green’ aspirations of the Lib Dem-dominated Department of Energy and Climate Change (DECC) against Conservative George Osborne’s Treasury, for whom the economy, politics and energy realism remain central issues. What last week’s publication of the UK energy bill reveals however, is that the DECC green policies – and the economic pain they cause to energy consumers – are driving the British energy strategy.

While Chancellor George Osborne’s covert campaign to put an end to Britain’s ill-considered “greenest ever government” commitment, the new Bill is a ‘triumph’ for Energy Secretary Ed Davey’s green zealotry. It is also a further blow for UK energy consumers already burdened by soaring energy prices.

Ignoring the public anger over spiralling energy prices, Davey proposes to introduce a new green levy which favors low carbon energy producers, especially nuclear power, renewables and, possibly (we await an announcement), natural gas. Already paying some of the highest electricity prices in Europe, Davey’s latest Green Deal energy strategy triples the UK’s green subsidy tariff for consumers. The aim is to deliver 30 percent of renewable power to the UK energy mix by 2020; a highly ambitious target that goes further than the EU’s goal of 20 percent.

Though public comments by two key new Conservative appointees – John Hayes, as deputy to Lib Dem Energy Secretary Ed Davey, and new Environment Secretary, Owen Patterson – signalled a growing government concern over energy costs, the new Energy Bill adds yet another green levy burden. The Bill does this by guaranteeing “strike prices” for renewably-sourced energy producers and introducing a new green levy funding mechanism on consumers to pay for it.

Pivotal to the Bill is the introduction of a government-owned entity that will buy electricity at an agreed “strike price” from low carbon generators. The costs would be recovered from consumers via their suppliers. The current Renewables Obligation (RO) regime that requires the six UK power supply companies to buy twenty percent of their electricity from renewable sources will continue until 2017. Between 2014 and 2017 the RO will run in tandem with a new Contracts-for-Difference Feed-in-Tariff (CfD FiT) that will be the sole subsidy mechanism after 2017.  RO and CfD FiT costs collectively would be capped under a new Levy Control Framework (LCF).

In practice this means the UK’s current subsidy regime is to be tripled from £2.35 billion ($3.7 billion) to £7.6 billion ($12 billion) by 2020 in real terms. However, the full estimated cost, when all the Bill’s reforms are factored in, is around £110 billion ($177 billion).

Jonathan Lane of Global Data provides insight into the Bill’s impact on pricing and energy security. Lane points out four critical areas that reveal the government’s cost calculations are “misleading” given the volatility of its key elements. They include the uncertainty of fossil fuel prices, particularly natural gas, to 2020; how much electricity the LCF would be able to buy; the impact of energy efficiency measures on demand and the impact of pro-electrification policies, as with electric cars.

Lane highlights how, for low carbon generators, the Bill is “largely very positive” – with a guaranteed covering of costs, something of an understatement – but points out that “significant risks remain”. Chief among the risk is the favoring of nuclear and offshore wind development at a “strike price” to be negotiated. On that score, as Lane wryly points out, “developers hold most of the cards”.  Put bluntly, if the Bill’s strategy is to avoid failure, the onus is on the government to agree a green industry-placating high “strike price”.

Lane also predicts price volatility due to increasing “intermittent generation” from offshore windfarms, pointing to “rocketing” strike prices in Germany whenever supply has exceeded demand as when very cold-low wind periods hit.

Only too aware of the prospective damage that would be inflicted on Britain’s industrial competitiveness, UK Energy Secretary Ed Davey has responded quickly to concerns that major UK manufacturers may well flee to the United States where energy costs are significantly cheaper. “Decarbonisation should not mean deindustrialisation”, says Davey. That comment saw fellow Lib Dem, Business Secretary Vince Cable confirm a possible exemption for energy-intensive industry. But it’s a commitment that may well fall foul of EU competition rules. A similar commitment to exempt Germany’s heavy energy using manufacturers is already under review by the EU’s antitrust authorities. In November, EU Energy Minister Gunther Oettinger made it clear that “member states may soon face a ban on domestic subsidy initiatives” especially the “unregulated proliferation of green energy subsidies.” According to Oettinger, new green subsidy regimes are a reflection of “growing nationalism in the electricity sector”. And given the EU’s pursuit of a centrally controlled internal energy market by 2014, we might expect the EU to intervene to end yet more nationally-instigated green subsidies.

But two further points are worth making.

According to a poll of the strongly leftwing UK Guardian – a constituency strongly favoring the green energy revolution – over two-thirds of Guardianistas, a full 69 percent, are not prepared to pay any more for renewably-sourced energy. Increasingly, even idealistic greens are realising the increasingly burdensome impact green taxes are having on energy bills; a fact EDF Energy, one of the UK’s Big Six power suppliers, inadvertently made clear while announcing a “brutal” 10.8 price rise for customers. Unfortunately for the ideologues at Davey’s DECC, The Register’s Lewis Page had bothered to read the small print at the bottom of EDF’s press release announcing the move. What Page points out is that, by EDF’s own admission, a mere two percent of the rise results from the cost of buying energy on the open market. The rest – almost 9 percent – is, according to EDF, directly due to “renewable, energy efficiency and social schemes” with a small part due to “transmission and distribution charges”.

One way or another, the writing may already be on the wall for Ed Davey’s idealistic green policy-driven new UK Energy Bill. Hell from rising prices, something that even Guardianistas can read.

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