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Cameron's plan to cut green levies will cost us all

Jane Fae

28 October 2013

The truth is that 'green costs' are an investment that benefit all of us. Yet, to capitalise on that investment will take long-term vision, commitment, and a willingness to make and explain hard decisions.

Where the UK should be powering ahead, we are failing to capitalise on our potential.

As Cameron dug his party deeper and deeper into the energy mire yesterday afternoon, it was the words of another prime minister which sprung most easily to mind.

Faced with populist jubilation at the start of the oddly-named War of Jenkin's Ear, Robert Walpole presciently declared: "They may ring their bells now, but they will soon be wringing their hands."

Or to put it another way: declaring war on things, from drugs to porn to energy companies, almost always goes down well with the public - and continues to do so until the bills, whether counted in lives or taxes, wash up on their doorsteps. Although, in the case of energy, it will not be this government or even, perhaps, this generation, that will pay the price.

Energy investment is a long game, requiring a degree of strategic thinking that is all too often absent from the political hurly-burly. A decision now to invest in additional coal capacity might see a new plant coming online in a decade or so - and still with us into the 2050's or beyond. However, with energy now well and truly on the election map, it is clear that the time-scale for thinking has shrunk and shrunk again to near vanishing levels.

That's a problem. The shorter the stable timeframe, the more expensive any energy decision is likely to be, with voters eventually paying a premium - to energy suppliers - to compensate for the fact that energy projects (and especially renewable ones) are riskier for the investor, who invariably responds by factoring in higher returns.

This is basic capitalism, and therefore all the more surprising that Cameron appears unaware of it.

Over the last few years, EU members have reacted to changing economic circumstances and shifts in the cost of renewable technology. With around one-third of its electricity coming from renewable sources in 2010, and significant state support for solar power, Spain was well on its way to becoming a world leader in both wind and solar.

It was therefore a sobering moment for the solar industry worldwide when the election of a conservative government in 2011 brought an abrupt halt to subsidies for renewables across the board. Yes: arguably Spain’s focus on solar power was driven more by technological ambition. This was strategic development - a calculation that a strong solar sector would do more for the economy in the long term - whereas support for wind power made more immediate economic sense.

What no-one in the sector was prepared for was the speed with which Spain threw its renewable plans into reverse. Solar plant manufacturers from Europe to China saw their stock value plummet by billions of euros. Spanish power companies offloaded solar plant into Portugal, so causing a temporary crisis for suppliers in that market. The effects were not trivial.

Other EU members have also responded over the last few years to what is in fact a success story: initial pump-priming, in the form of subsidy, resulting in an over-supply of solar energy. Germany, the UK and Italy have all cut back in this area. Less drastically, to be sure, but in each case the effect has been similar: confidence in the market for renewables undermined; companies less likely to invest and a risk premium factored in and at least partly passed on to the rest of us.

In fact, it is not decreasing subsidy, per se, that is the problem. Almost all countries that provide renewable support also publish rates some years ahead, giving investors fair warning of the level of 'degression' built in, enabling them to shape business plans accordingly.

In the UK, support levels for feed-in tariffs (FITs) are varied by energy source and size of plant, with actual and forecast degression levels published quarterly. On the surface, this provides energy companies with the security they need for ongoing investment. The UK should, also, be a prime candidate for inward investment in the renewable sphere, given the sheer magnitude of its renewable targets.

As part of the EU's 20-20-20 commitment, the UK is signed up to shift the share of its final energy use to 15% from renewables by 2020. With one of the largest absolute shortfalls against that target in the EU (14.8mtoe in 2011) representing a near threefold increase against current usage, that is a potentially massive opportunity.

Or it would be, were it not for our chequered history to date. Unlike much of the rest of the EU - and unlike Germany, which has posted a major success story in growing its renewable sector -the UK has mostly eschewed the simple FIT approach to support in favour of a ragbag of measures. These include the 'renewables obligation', which is effectively a quota mechanism imposing costs on generators who fail to generate a set proportion of their electricity from renewables and more recently, courtesy of the energy bill, a most peculiar mechanism, otherwise known as 'contracts for difference'.

This has the industry scratching its head and alongside the UK's volte-face on solar subsidy, not to mention yesterday’s stirring declaration on cutting green energy costs, can only have one effect: to confirm, once again, that the UK is signed up but not altogether committed.

Which is a pity. From Brazil to Canada to Norway, the ranks of nations producing two thirds - or more - of their electricity from renewables is growing rapidly. For most on this list, their achievement is rooted in lucky geography: they just happen to be situated on top of massive hydro resources, a mature, proven technology.

Year on year, though, the other renewable technologies are maturing, their costs dropping. In 2017, for instance, according to the US Energy Information Administration, the levelised cost of electricity, which is a key comparator of generating effectiveness, is likely to average $96/MWh for new wind plant as opposed to $97.4/MWh for conventional coal. Parity! And significantly less than almost any other option except gas.

Situated on the wind-swept Atlantic edge of Europe, the UK is well-placed to take advantage of this shifting cost differential. We are naturally well-suited to take advantage of what some have hitherto seen as a downside to our climate: the wind.

Even here, however, where the UK should be powering ahead, we are failing to capitalise on our potential. Onshore wind, which was never going to be the real solution, is increasingly stymied by nimbyish councils. Offshore, which some commentators have suggested is eventually capable of supplying up to 50% of our needs, is going slow.

Instead, the glittering prizes are going to Denmark, on target to generate some 50% of its electricity from wind by 2020 - and with a renewable industry currently supplying around half the world’s wind turbines. How did we miss out on that one?

Ah, yes. Back to where we began, with wind of quite another sort: parliamentary blowhardery, designed to thrill the public short term - and doing next to nothing for the future.

The truth is that 'green costs' are an investment that benefit all of us. Yet, to capitalise on that investment will take long-term vision, commitment, and a willingness to make and explain hard decisions. That, on yesterday's evidence, is something this prime minister singularly lacks.

Jane Fae is an expert in issues relating to energy and climate change issues. Her focus is on the technical, infrastructure and economic issues underpinning the electricity industry, covering topics related to generation, transmission and distribution, smart grid/smart homes and the prospects for electric vehicles.

She co-authored a recent report - Maintaining growth in the renewables sector - which explored the various renewable support mechanisms now in place with Europe's top electricity generators and the prospects for expansion of the renewable sector both in the short and medium term.

This article was first published on the Politics website.

Image courtesy of www.shutterstock.com

 

 

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