Conclusions and recommendations
Factors affecting investor confidence
1.There has been a dip in investor confidence in the UK energy sector since the election in May 2015. We have identified six factors that, when combined, are having a damaging effect on investor confidence. These are:
i)Sudden and numerous policy announcements
ii)A lack of transparency in the decision-making process
iii)Insufficient consideration of investor impacts
iv)Policy inconsistency and contradictory approaches
v)Lack of a long-term vision
vi)A policy “cliff-edge” in 2020 (Paragraph 9)
Why does investor confidence matter?
2.The pace of current investment activity in projects that are close to completion (in order to get ahead of regulatory changes) may be masking a slowing down of investment in the earlier stages of the project pipeline. However, the impact of this will only really become visible in three to five years. While there is anecdotal evidence that this slowdown is taking place, it is too early to provide hard data. The Government should monitor this through DECC’s Renewable Energy Planning Database and the Planning Inspectorate Register of Applications and report back to us annually, through the course of the Parliament, on the health of the energy project pipeline. (Paragraph 33)
Cost to consumers
3.We are concerned that the Government appears to be considering only short-term costs to consumers when making energy policy decisions. Increasing policy uncertainty leads to increased risk premiums, which will result in consumers paying more in the long-run. In addition to considering the needs of today’s consumers, Government also has a responsibility to consider the impact of its decisions on risk premiums which will directly affect prices paid by the next generation of consumers. (Paragraph 40)
Immediate actions
4.The Government needs to take immediate action to address (i) specific issues linked to Contracts-for-Difference, and (ii) the policy “cliff-edge” issue. This requires Government to set out more detail about the CfD auctions that are due to take place this decade, as well as how the Levy Control Framework is managed pre-2020. The Government must also be clear about what will happen to the existing suite of policy tools beyond 2020. In particular clarity is needed on the Levy Control Framework post-2020, and the Carbon Price Floor beyond 2020. Recommendations about the Levy Control Framework are set out in chapter four. (Paragraph 42)
5.There are a number of unanswered questions that the Government needs to respond to:
i)When will there be clarification on when the three CfD auctions will take place?
ii)What budget will be available for the CfD auctions, and how far in advance of the auctions will the Government communicate this to help investors plan?
iii)Which technologies will be eligible to take part in the CfD auctions?
iv)How much must costs fall by in order for offshore wind projects to remain eligible for support under the CfD? Does this condition apply to all technologies, or just offshore wind?
v)What will happen to the Carbon Price Floor beyond 2020? (Paragraph 43)
Providing a long term vision and the pathway to achieve it
6.The “Carbon Plan” for achieving the fifth carbon budget represents an ideal opportunity for rebuilding confidence in the direction of travel for the energy sector in the UK. We have identified five key principles that the Government should follow as it develops the Plan over the course of 2016:
i)The Plan must be developed in full consultation with the investment community.
It will not be possible to meet our long-term climate change targets without significant levels of investment in energy infrastructure. It is essential that DECC understands investors’ needs as it develops the Plan.
ii)Any modelling or scenario work on the future energy mix that is carried out needs to be transparent and open to external scrutiny.
Investors need to feel confident that the methodology used is robust and where appropriate, have the opportunity to contribute.
iii)The Plan should provide more clarity about how transitions will be managed as new technologies become established, including the intended “glide path” out of subsidies.
Subsidies are not intended to last forever and it is right that support reduces as technology costs fall. However, this needs to be done in a consistent, transparent and controlled manner which can be clearly understood by investors and factored into their investment plans—which require long-term assessments to be made. This would both provide the appropriate downward pressure on subsidy levels, while mitigating investor concern about sudden, unexpected policy changes. In view of regulatory changes likely to be required as the regulatory framework evolves in response to changing power sector business models, it is critical that amendments to regulation are consulted on and introduced in a similarly transparent, predictable fashion.
iv)The Plan needs to retain sufficient flexibility to adapt to new technologies and innovations such as storage and demand-side response.
v)The Government should take steps to build a cross-party consensus around the Plan. (Paragraph 48)
7.There are a number of unanswered questions that the Government needs to respond to:
i)What consultations or engagement activities does DECC intend to conduct as part of the process of developing the Carbon Plan for the fifth carbon budget, and when will these activities take place?
ii)What modelling and/or scenario work will DECC be commissioning to inform the Carbon Plan?
iii)How will DECC factor in uncertainty around the role that new and emerging technologies (such as storage and demand-side measures) might play in the future energy mix as it develops the next Carbon Plan?
iv)What plans does DECC have to provide forewarning of decisions affecting the supply chain and what support will be provided to maintain jobs in the energy sector? (Paragraph 49)
Improving understanding of investor impacts
8.We recommend that Government develops its in-house capacity to analyse the consequences of its policies on investment (to the extent policy is expected to impact investment decision). Government should develop a complementary process to Economic Impact Assessments whereby the consequences for investment are assessed for all new policies. (Paragraph 51)
The institutional landscape
9.There is an important question about how the National Infrastructure Commission, Committee on Climate Change, Ofgem, Infrastructure and Project Authority, and Office for Budget Responsibility will work together. (Paragraph 53)
10.We note that HM Treasury is currently consulting on the governance, structure and operation of the National Infrastructure Commission (NIC). We recommend that the NIC has an explicit requirement to consider the infrastructure requirements of meeting the UK’s carbon budgets and long-term legally binding carbon reduction targets. (Paragraph 54)
11.The Government needs to explain exactly how DECC Ministers and officials intend to liaise with the newly-created National Infrastructure Commission (NIC), in particular in relation to the work which the NIC intends to commission on key aspects of energy sector investment. (Paragraph 55)
The Levy Control Framework
12.The rationale for introducing a Levy Control Framework (LCF) is sound: it is important that the costs to consumers of providing secure, low-carbon energy infrastructure are affordable and able to be managed in a transparent manner. However, the rationale has become blurred over time, particularly since the Capacity Market has not yet been incorporated into the LCF. We call on the Government to set out clearly the purpose of the LCF and to explain why the Capacity Market is not currently included, when it is clearly an electricity policy that results in levies on consumers’ bills. (Paragraph 65)
Lack of transparency on spending forecasts
13.The Levy Control Framework will play a central role in shaping the direction of near-term energy policy in the UK. There is no logical reason why the assumptions and methodologies used to calculate the projected spending should remain undisclosed, particularly given its importance to investors in assessing their risks. DECC Ministers have promised to make this information available on several occasions but seven months after the OBR’s surprising figures were published there has been no further clarification from Government. (Paragraph 80)
14.We call for the Government to improve transparency around its LCF spending calculations. It should make the assumptions and methodologies used in its calculations available publicly. In particular, it should answer the following questions:
i)What assumptions are being made about how much capacity will be built?
ii)What load factors are being assumed?
iii)What assumptions are being made about the number of projects in the pipeline that will actually go ahead?
iv)What assumptions have been made about future wholesale energy prices?
v)What assumptions were made about the proportion of the budget going to CCS (before the competition was ended)? (Paragraph 81)
15.We note that the National Audit Office has recently announced that it will be updating its 2013 review of the LCF, with a report due in summer 2016. We urge the NAO to consider the points we make in this chapter. (Paragraph 82)
16.We urge the Government to reinstate its annual reporting of DECC levy-funded schemes and other Government initiatives which affect energy bills but which fall outside of the Levy Control Framework. (Paragraph 84)
Uncertainty on dealing with projected overspends
17.We recommend that DECC develops and publishes a structured response plan, setting out how any future overspend would be dealt with, in order to increase transparency of the Government’s approach. This should set out criteria against which DECC would assess changes to policies and support levels, in the event of future overspend, including the anticipated impact of proposed changes. This should be done explicitly on the basis of grandfathering existing support levels (unless otherwise agreed), against an agreed timeframe, and preferably with consultation. (Paragraph 87)
Lack of clarity on the LCF beyond 2020
18.The Government should urgently set out what the budget for the LCF will be post-2020, but this must be done in the context of the 4th and 5th carbon budgets to ensure the available funding is consistent with meeting our longer-term carbon commitments. We also urge the Government to introduce rolling annual updates on a ten-year horizon, as recommended by the Committee on Climate Change. (Paragraph 92)
Conclusion
19.It is clear that the confidence of many investors has been dented by the Government’s actions since the election. The sudden, unexpected nature of many of the announcements has unsettled investors who had been used to receiving more forewarning of policy changes. There is a high risk that a hiatus in new developments has been created, pending further clarity on short- and longer-term policy. The Government removed support for renewables due to concerns about costs for consumers. But they have not set out the evidence base for this conclusion or for other decisions, and engagement with the investment community has been poor. (Paragraph 93)
20.The Government has been slow to set out its new direction of policy: the Secretary of State’s “reset” speech was made six months after the election. The emphasis on gas in this speech, followed one week later by the abrupt removal of funding for carbon capture and storage have left many wondering how clear the Government’s long-term vision really is. This has led to questions about how, and whether, the Government will meet its long-term climate change and security of supply objectives. (Paragraph 94)
21.It is not unusual that new Governments introduce new policies. But lessons must be learnt, not just by this Government but by future Governments, that there are ways in which things can be done without damaging investor confidence. The policy uncertainty caused by policy changes made through the first six months after the election was unhelpful, but we are hopeful that things can now begin to move in a more positive direction. We recommend that the Government should give a clear statement on policy direction by May 2016. (Paragraph 96)
22.Post-Paris, and in the lead up to setting the fifth carbon budget the Government has an important opportunity to rebuild long-term confidence in the UK, by adding detail and balance to a range of issues flagged in the “reset” speech and clarifying the future growth and “opportunity” in the renewable energy and other low carbon sectors. Although it is disappointing that the UK has fallen down the global ranking in recent months, it is worth noting that we are still relatively well placed to attract international investment. In this report, we have identified the risk of an investment hiatus for new projects but we have also outlined the specific areas that are problematic and sharpened the assessment of where a response is needed. We have set out some of the steps that the Government should take if it is to restore trust, start to re-establish the investor confidence that has been lost, and begin to restore the attractiveness of the UK as an investment destination for the many global investors seeking new opportunities. (Paragraph 97)
© Parliamentary copyright 2015
Prepared 1 March 2016