Out-Law News 3 min. read
08 Mar 2016, 10:14 am
The Energy and Climate Change Committee has called for more "transparency and clarity" over the direction of future energy policy. In particular, the government should publish the potential impact of new policies on investment based on its 'economic impact assessments', as well as set out its plans to encourage investment once the existing Levy Control Framework (LCF) cost cap comes to an end in 2020, it said in its report.
The committee's report was published as the government set out changes to the Renewable Heat Incentive (RHI), a subsidy for domestic and business users of qualifying renewable heat technologies. The changes, which include lower tariffs and new cost control measures, come into force on 24 March 2016.
"Billions of pounds of investment is needed in order to replace aging energy infrastructure, maintain secure energy supplies and meet our legally-binding climate change targets," said committee chair Angus MacNeil.
"Nervousness among investors will make it harder and more expensive to build the new energy infrastructure that we need. Any increase in the cost of project capital will ultimately get passed on to consumers through higher energy bills ... It can take the best part of a decade or more to plan, finance and build new gas-fired power plants, wind farms and nuclear power stations. Decisions made by the government now have long-term impacts so it is important that the government thinks carefully about the consequences for investors before leaping into policy decisions," he said.
The government's Department of Energy and Climate Change (DECC) has estimated that the UK needs around £110 billion worth of investment over the next decade in order to replace its aging energy infrastructure and match increasing demand, while still meeting international climate change commitments. However, the committee said that policy changes by the government since the election in May had "increased nervousness among some investors", including its decision to end support for onshore wind and solar earlier than planned and close the 'Green Deal' energy efficiency scheme.
Investor confidence had also been damaged by "contradictory signals" and a lack of transparency around policy decisions from the government, as well as the policy "cliff edge" built into the LCF, the committee said. The LCF caps the cost of renewable energy subsidies that can be passed on to consumers through consumer bills. However, the current mechanism only runs until 2020, which is the same year in which the 'carbon price floor' permit system for emissions from fossil fuel plants also expires.
The government is due to publish its 'fifth carbon budget', which will put a legal limit on UK emissions of greenhouse gases between 2028 and 2032 in line with international climate change commitments, later this year. The committee said that this process would give the government an "ideal opportunity … to build a shared vision of the direction of travel" for low carbon energy investment. It urged the government to develop this plan "in full consultation with the investment community" in a transparent, open way while retaining "sufficient flexibility" to adapt to future technology developments such as storage and demand-side response.
In the short to medium term, the committee has also called on the government to publish a "detailed plan" for when the next three rounds of Contracts for Difference auctions will be held, as well as confirming how much money will be available and which technologies will be eligible to take part. It should also publish the "assumptions and methodologies" underpinning the LCF in order to give investors more oversight of how much money is being spent under the current arrangements, and build the need to consider how infrastructure will fit into the UK's legally binding carbon reduction commitments into the design of the National Infrastructure Committee, it said in its report.
In a statement published on its website, DECC said that the government's priority was "to ensure our families and businesses have access to the secure, affordable and clean energy supplies they can rely on now and in the future".
"To deliver this, long-term decisions are being taken to tackle a legacy of under-investment in the UK's energy system - creating the right environment for businesses to invest in clean, affordable energy and building an energy infrastructure fit for the 21st century. At the same time action is being taken to keep bills as low as possible to protect consumers and ensure they get value for money, including by being tough on subsidies so that technologies stand on their own two feet," the department said.