HC 1605 Energy and Climate Change and Environmental Audit CommitteesWritten evidence submitted by Alan Simpson and Gerard Read

Alan Simpson was MP for Nottingham South until 2010. He was the architect of feed in tariff amendments in the Energy Act 2010 and advisor to Labour Ministers on its implementation. He continues to advise MPs of all parties on renewable energy policies and works independently with NGOs and others on energy and climate issues.

Gerard Read is the European Head of clean-tech investment analysis for Jeffries Bank. Based in Berlin and London. He has worked extensively with German policy makers on the development of their Feed in Tariff framework for renewable energy and is one of the leading authorities on energy transformation strategies.

1. Evidence Summary

(a)The central issue in the debate about Feed-in-Tariffs (FITs) is not their affordability. It is the potential of FITs to change the whole energy debate. This is what makes the issue so charged. Both the opponents and proponents of FITs know this.

(b)FITs are potentially the most exciting tool governments have for bringing about both market change and culture change in energy policy.

(c)As in Germany, FITs offer governments the ability to break the hold energy cartels have traditionally had over national energy policies by opening up and decentralising the market.

(d)The current “crisis” within the UK FITs programme is largely self-made; stemming from defective design in the original DECC scheme and defective thinking in the Treasury (by turning it into a fixed budget programme). Both defects are absent from the German approach and are easily remedied in the UK.

(e)The German experience is that, structured properly, FITs:

generate more money than they cost;

change public perceptions about energy production and consumption;

reduce, rather than increase, energy bills; and

transform government thinking about intervention mechanisms (from permanent energy subsidies to transitional ones).

(f)Current UK policy confusion deeply damages confidence that Britain is a safe place in which to invest.

2. Background to the UK FITs Programme (AS)

2.1 It is important to recognise that the FITs amendments to the Energy Act 2008 were delivered on an all-Party basis. For several years prior to this I (AS) had tried to press the idea upon government Ministers, but with little success. By then the UK was seen as having the most expensive mechanisms in Europe for delivering (very little) renewable energy. Britain was third to bottom of the EU renewable energy league (only better than Malta and Luxemburg). On several occasions I had brought Herman Scheer into parliament to discuss the merits of FITs with Ministers and civil servants. Herr Scheer was the German MP behind Germany’s FITs programme and the guiding light in the wider Euro Solar movement.

2.2 At both a political and an administrative level, these meetings were disappointing; Herr Scheer’s easy, urbane manner and deep understanding contrasting strongly with the lack of knowledge and interest amongst UK officials and Ministers. It was clear that UK energy policy had settled into the comfort zone of being a catering service to the interests of the Big 6 energy companies. All proposals for a UK FITs programme were resisted.

2.3 The Energy Bill (2007) became the vehicle for changing all this. By that time—despite opposition from civil servants, government ministers and the energy companies—a parliamentary majority had emerged that would press FITs into the Bill. All the Opposition parties supported the amendments we were bringing forward. On the eve of local government elections, 38 Labour MPs also voted for the (unsuccessful) amendment before it passed to the Lords.

2.4 By the time the Bill returned to the Commons there was a new Department responsible for it (DECC) and a new Secretary of State. Just as important, there were now 60 Labour MPs committed to the cross-party intention to force the FITs amendment into the Bill.

2.5 Energy companies and civil servants were still determined that Britain would not take the same comprehensive approach to FITs that the Germans had done. They argued that FITs should be limited to “micro generation” schemes of less than 50kW (which is what the scheme has been reduced to now).

2.6 Proponents of the FITs amendment wanted it to be more ambitious and open ended. Both the Conservative and Lib Dem parties wanted a de minimus threshold of up to 10MW. The compromise of a 5MW ceiling allowed the Secretary of State to offer this as an initial stage, whilst Opposition parties could regret the lack of ambition and pledge to double it. Cynicism and incompetence have helped reverse these undertakings.

3. The Framework of the UK Scheme

3.1 A huge amount of background work, outside parliament, had gone into preparing the framework for a UK FITs programme. Unfortunately, most of this was disregarded by the Treasury and DECC. The Renewable Energy Association (REA), Friends of the Earth and Pyory analysts had done detailed modeling for a framework that would not have walked into the muddle FITs is now in.

3.2 The most obvious shortcomings in DECC’s original approach included:

(i)Treasury and DECC economists were instructed to model a scheme that would only deliver up to 2% of UK energy needs,

(ii)No consideration was given to the early take up of FITs by community-owned energy initiatives or social housing providers,

(iii)No independent framework for triggering the review of tariff rates was established, and

The UK declined to put in place any of the mechanisms Germany had used to share the benefits and savings from FITs with bill payers, as well as the costs.

3.3 Following the General Election, two further defects were added:

(i)The unnecessary (and untruthful) claim that FITs had to be included in the Comprehensive Spending Review, and

(ii)The conversion of FITs from a freestanding, self-financing element within energy sector accounting, into a fixed budget scheme.

These last two steps account, in large measure, for the confusion the UK FITs scheme is now caught up in.

4. Beginning from somewhere else; the Lessons from Germany

4.1 German citizens have had a legal right to supply electricity to the grid since 1990, but this was paid for at the same price as the electricity they bought. In 2000, the German government began work on legislation that would offer preferential tariff rates for renewable energy supplied to their grid. The Germans had also chosen to give renewables priority access to the grid (under the provisions of the EU’s Renewable Energy Directive, 1995). It was not until the middle of the decade that the programme really took off. Current comparisons with the UK are somewhat stark:

(i)Britain has installed roughly 500MW of solar energy in the last decade. Germany has installed over 50GW of renewable energy (35GW solar) in half this time.

(ii)The UK “crisis” in FITs comes when perhaps 350MW has been installed under the programme. Germany is now installing many times this amount (8GW last year alone).

(iii)The German FITs programme is a freestanding element within the energy sector accounts. It does not count against public expenditure.

(iv)Employment in the German solar sector has just passed the 150,000 figure.

(v)Solar has become the major technology that has engaged citizen involvement in Germany’s “energy futures” debate.

(vi)The programme has generated over €10 billion of new investment per year and given Germany 15% of the world market in renewables.

(vii)The ambition levels for renewable energy, coupled with the progressive “degression” rates applied to FITs (for different renewable energy systems) have driven huge efficiency gains, particularly in the cost of solar panels. German panel prices have fallen by 50% in the last year.

(viii)By the middle of this decade, Germany expects the cost of generating solar electricity to have fallen to grid parity levels.

(ix)As in the UK, government tax and insurance receipts from the solar sector exceed the cost of tariff payments.

(x)The FITs programme has helped drive down German energy bills rather than inflate them, with energy prices below pre-Fukushima levels. The following diagrams illustrate this:

4.2 The most critical point for the Committee to grasp is in this second diagram. German electricity production no longer “peaks” in dramatic undulations. Solar and wind energy generation take up to 25% from peak production needs from power stations. This also reduces peak prices; meaning that the major energy companies are no longer the major determinants of German energy prices. These price savings are passed on (currently) to German industry. The next step is to extend this to all energy customers.

5. An Energy Democracy?

5.1 The UK has one of the most closed energy markets in Europe. When the Coalition government came into office, Ministers pledged to open up this market to make it more transparent and competitive. Current market reform proposals will do the opposite. FITs are central to the task of creating a genuine energy democracy in the UK. To understand this it is worth considering one further diagram. It relates to the new patterns of ownership emerging in the German energy sector by mid 2010.

5.2 Earlier this month, we were involved in a group visit to Germany, to meet with politicians, bank officials and senior policy makers. The purpose was to understand how Germany had been able to construct a scheme that was ambitious, transparent and consistent, in ways that Britain has struggled with. The key points to emerge from the meetings with German officials included the following:

(i)The actual market size of the renewable energy sector now stands at over 50GW rather than 43GW. Such is its rate of growth.

(ii)Over half of this renewable energy market is owned by households, farmers and communities.

(iii)Utilitiy companies own no more than 13% of the new energy market.

(iv)Germany has no problems of grid capacity in managing this level of renewables. Berlin, for example, already gets over 40% of its electricity from renewables.

(v)There is a clear framework for tariff degression rates that delivers investment security to the whole programme of decentralised and renewable energy generation.

5.3 Germany is using FITs to construct a much more decentralised and democratised energy system. In contrast, 99% of the UK energy market is owned by the Big 6 and energy market subsidies have been structured to support this.

6. The way to cut UK Tariff Rates

6.1 No one opposing the proposed cut in tariff rates is arguing against reductions per se. Six months ago, the industry proposed a 25% reduction in solar tariffs; arguing that the falling cost of solar panels had to be reflected in both the prices charged to customers and the tariff rates paid to them. They wanted DECC to use this to open up a more structured review process for tariff adjustments. This never happened.

6.2 The Committee may wish to examine, in detail, the role played by permanent officials in DECC in pushing (or not) the pace of the Comprehensive Review of FITs. The delayed report effectively bounced Ministers into the current tariff-cut fiasco.

6.3 An earlier “leaked” draft of the review proposed a solar tariff of 9p/kW. This was consistent with stories circulating that senior officials were pushing for solar tariffs of no more than 2 ROCs. This is where DECC policy is heading. What is unclear is whether the move is being driven by politicians or officials. It does, however, make a mockery of DECC claims that UK tariffs should be set at German levels.

6.4 The DECC review has nothing to do with growing the industry. It has more to do with killing off a policy it didn’t want to begin with. Specifically:

(i)DECC has taken an arbitrary and knee-jerk approach to tariff cuts, undermining long term investment in the process, and

(ii)The cuts have more to do with not embarrassing the Treasury than an overheating renewable energy sector.

Both of these defects are easily remedied.

6.5 In Germany, the Approach to Tariffs and Targets is a Clear and Structured One

(i)Several universities contribute (independently) to the analysis of technology costs and market conditions. These are reviewed on a six monthly basis and there is complete transparency to the process.

(ii)The government then sets out its framework for targets and tariff adjustments. Currently the framework specifies that:

(a)Solar tariff rates will fall at a minimum rate of 15% each year, for the first 3.5GW of installed capacity, and

(b)For every 1GW of additional PV installations there will be a further 3% cut in tariffs, up to a maximum of 15% in any one year.

6.6 It would not be difficult to set up a similar structure for planned growth of the sector in the UK. The obstacles are that to do so would disrupt the cosy relationship between DECC and the Big 6 energy companies. It would require DECC to set up an arms length and transparent review process for tariff adjustments. And it would require the Treasury to let go of the unnecessary straight jacket it has imposed on the UK FITs programme.

6.7 The most absurd part of the current controversy over FITs tariff rates is that it completely lacks perspective. Ofgem’s assessment of total scheme costs is that FITs might add £1 per year to household energy bills this year. This compares with the £175 increase of bills arising from price increases announced by energy companies (about which there appears to be little debate).

6.8 Ofgem’s assessment of FITs costs is a conditional one, because Treasury receipts (in tax and NI from the 39,000 jobs created so far) are likely to result in the programme raising more revenue than it costs. Moreover, in Germany the cost/benefit calculation also includes the “avoided cost” of fossil fuel consumption (that has been replaced by renewable energy production). Deutsche Bank calculated that, in 2008, this amounted to a revenue “gain” of some €800 million in energy cost savings.

7. Conclusions

7.1 The UK could not easily match the scale of German solar installations. However, an annual UK target of 1GW of installed solar PV is easily within reach. The problem is neither cost nor capability. It is the absence of leadership and vision, at both a political and administrative level.

7.2 Since the inception of FITs, most of DECC’s energies have gone into delivering its organised underperformance. At every opportunity, the debate has been turned to restricting FITs impact rather than widening its application. No attempt has been made to use FITs as a vehicle for opening up the UK energy market, or for transforming energy subsidies (from permanent into transitional ones), or as a means of delivering the radical decentralisation that both Coalition partners are committed to.

7.3 There was no need for a second tariff review within a single year, or for cuts programmed to take effect before the public consultation process concluded. DECC has unused funds in other renewable energy programmes that could have been used to cover a more open and reflective review process. The Treasury has not been asked to approve such a move. The effect has been to take an important policy initiative and turn it from the transformational to the trivial. It is the precursor to neutering the scheme altogether.

7.4 DECC’s external reputation, for growing the UK renewable energy sector, is a largely discredited one. The Committee may wish to look more widely at the FITs programme as an example of the Department’s inconsistent approach to the use of its various subsidy schemes, its obsession with managed under-performance, and its reluctance to pool accrued surpluses in some parts of its renewables portfolio in order to accommodate unanticipated growth in other sectors. This is particularly important in relation to the construction (or destruction) of investor confidence in the UK.

7.5 In line with advice given to us by German policy makers, the single most important step the UK could take to “up” its renewable energy game is to expand its solar roofs programme. The reasoning behind the advice is that PV is the most non-disruptive technology that can be quickly deployed in any part of the country, and the one most guaranteed to promote a social change in energy thinking. Within the UK model, PV also has the greatest ability to link public discussions about demand reduction measures into those on new energy generation.

7.6 DECC lacks any coherent view about a tariff that promotes genuinely community-owned renewable energy generation and risks destroying many embryonic coops by arbitrary cuts. Existing tariff rates should apply to community owned schemes until an effective alternative formula is devised. Reducing the “pooled” tariff rates, without having a replacement mechanism in place will break some of the existing community schemes.

7.7 Current government constraints make it inevitable that DECC will have to find ways of excluding the poor so as not to break the (artificial) Treasury cap. This is the most serious criticism of what DECC is doing. It could be avoided by taking FITs out of public expenditure accounting, in the way the Germans have done. However, within the Coalition there does not appear to be the political or administrative will to do so.

In other countries, FITs are used to drive energy market transformation rather than to promote individual technologies. They force a shift from permanent to transitional subsidies. It is understandable that energy cartel interests should resist such changes. The Committee may wish to ask why the government would wish to be complicit in such a process in the UK?

Should the Committee wish, we would be happy to give oral evidence in support of this statement, either about the background to the UK scheme or the comparisons with Germany.

24 November 2011