Will green subsidies survive the spending review?
So, here we are. Its summer recess and we are just shy of three months into a new Government. In a few short months we have witnessed the unexpected election of a majority Conservative government, an emergency Budget the Chancellor is likely to have anticipated delivering in coalition and the launch of a spending review that requires Government Departments to secure 25% – 40% savings over the course of this parliament.
Looking specifically at energy policy, in the Budget and during the last week alone we have seen some hefty announcements. Delivering the Red Book on 8th July George Osborne announced the scrapping of the Climate Change Levy exemption for renewable electricity generators. Reading the Budget this appeared to tackle the break that overseas generators received; whilst this was undoubtedly a key driver this should be viewed in the context of a Department that needs to start making big savings and was a measure that will have impacted investor confidence in the renewables and other energy sectors in the UK. Drax’s share price alone dropped 28% after the measure was announced.
Last week, Amber Rudd, the new Secretary of State for Energy and Climate Change, made her first appearance before the Energy Select Committee. Ms. Rudd gave a good performance, answering questions from the cross-party scrutiny committee of MPs ranging from consumer energy prices, aspirations for the Paris climate talks, Hinkley Point C and Electricity Market Reform. What Ms. Rudd’s responses lacked in detail they made up for in aspiration. Taking questions on energy efficiency the Energy Secretary said that this was an area that she was particularly enthusiastic about in terms of reducing household bills and lowering carbon emissions. Less than a week later her Department announced the end of the Green Deal.
Other areas that piqued Ms. Rudd’s interest were lowering the nation’s heat emissions. Rather than giving up on heat, the Minister wanted to “step-up” heat’s contribution to reducing carbon emissions. Ms. Rudd then went on to intimate that the Renewable Heat Incentive could be for the chop in the forthcoming spending review.
Both of these examples, whilst not front page news in themselves (the Green Deal arguably being a failed policy), do serve to underline a broader point that this Government, unrestrained by coalition, has moved away from previous green motives.
During her select committee appearance Ms. Rudd bounced between the traditional three corners of the so-called “energy trilemma” – providing energy that is secure, affordable and low carbon. The theme that kept emerging from the Energy Secretary was affordability. Ms. Rudd made clear that energy needed to be affordable for consumers. She is also uncomfortable with the idea of subsidy but very open to suggestions on how energy companies can provide consumers with energy that helps the UK meet its climate obligations. In addition, Ms. Rudd sees carbon targets rather than renewable targets as the key to lowering our carbon emissions.
With an emphasis on low carbon rather than renewables, and a focus on consumer value for money, we can expect an emphasis on gas with support from new nuclear in electricity generation. However, given the faltering start the UK’s “shale revolution” has experienced and the lengthy process for bringing new nuclear projects forward, we are left with an unclear picture of what exactly Britain’s energy mix will look like in the coming years.
Much more will be clear when the Chancellor publishes his spending review in November. Nevertheless, regardless of the level of green subsidy we can expect to see going forward, this Government’s knack for pulling subsidy at short notice will cause ripples in investor confidence that could extend beyond just renewable energy.