Appendix: Government’s response to our work on investor confidence in the UK energy sector
Government response as sent to us on 28 June 2016
Introduction
The Department of Energy and Climate Change welcomes the Committee’s interest in analysing investor confidence in the UK Energy sector.
DECC fully recognises that significant investment is needed in our energy sector and remains committed to ensuring a pipeline of investment continues over the course of this Parliament and beyond. That is why we are taking action to maintain the momentum of Contracts for Difference (CfD) auctions for less established technologies including offshore wind and are taking steps to reform the Capacity Market.
To date, the UK has seen significant investment in the energy sector. While Europe experienced a drop off in renewables investment by 30% in 2015, the UK saw a record increase in investment, (up to £13bn), up by 25% on 2014 figures. There is no hard evidence to suggest that the cost of financing has increased for renewables or other technologies.
The Committee has concluded that there are six factors which have had an impact on investor confidence in the UK Energy sector and has made three recommendations based on these findings.
Conclusions
Conclusion 1
Sudden and numerous policy announcements have marred the UK’s reputation for stable and predictable policy development.
This Government has made a series of decisions since the election which we believe are necessary to protect hardworking families by keeping bills low, while continuing to attract investment into our energy system.
After the election, projections in May 2015 showed a significant overspend on renewable support under the Levy Control Framework (LCF). To protect families and businesses that ultimately have to pay these costs, we decided to act swiftly and introduce a package of reforms to get costs under control. We are also delivering on our manifesto commitment to halt new subsidies for onshore wind and give people the final say on onshore wind developments in their community.
The Government’s record on renewable electricity speaks for itself—we are projected to have 35% of electricity derived from renewable sources by 20201 and rather than stalling, investment in renewables has increased by 42% in the UK since 2010, whilst over the same period it has fallen by 64% in the rest of Europe.
The Secretary of State set out a clear vision for the Government’s energy policy last November, and we have seen feedback from a range of investors and energy companies that DECC’s actions since then have increased certainty and investor confidence, by moving towards a market based system and removing market distortions. This includes providing further clarity on the Capacity Market, on Contracts for Difference (CfD) auctions over the next four years, and on taxation for the UK’s oil and gas industry.
Conclusion 2
A lack of transparency in the decision-making process [particularly on the LCF] has led investors to question the Government’s rationale for policy changes and to wonder “what will be next?”
DECC has taken action to control the LCF, ensuring bills are kept as low as possible and providing support to technologies that need it most. For example, the measures announced in December 2015 to close the Renewables Obligation early to small-scale solar and introduce caps for future tariffs on Feed-in-Tariffs (FITs) are forecast to save £500m from the current projected LCF spend in 2020/21.
The Government does not accept that the decision-making process has not been transparent. DECC has shown clear transparency by publishing details of the assumptions which underpin the LCF modelling, consistent with protecting commercially sensitive information. Strike prices for signed CfDs are available on the LCCC website. Renewables Obligation and FITs Scheme deployment data are published monthly on the Renewable Energy Planning database and the Ofgem website.2 We will continue to consult on major policy decisions, such as our reforms to the Capacity Market.
Conclusion 3
There has been insufficient consideration of investor impacts, exemplified by insufficient consultation and engagement ahead of policy decisions.
Evidence-based research remains at the foundation of DECC’s policy making process, which includes analysis of quantitative data, written consultations, and meetings with investors and operators. Ahead of the proposed changes to the FITs Scheme, DECC consulted widely, receiving 55,000 responses.
On policy decisions related to onshore wind, DECC met with hundreds of stakeholders in England, Scotland and Wales to hear their views and carefully assess the evidence, ensuring that any policy decisions will strike the right balance between the public interest of protecting consumer bills and the interests of onshore wind developers and investors. In addition, some measures—such as to halt the spread of onshore windfarms—were clear manifesto commitments.
Key industry stakeholders have praised us for our ability to engage, listen and respond to concerns. Renewable Energy Association has said “Praise has to be given to DECC ministers in their willingness to listen and change”.
Conclusion 4
Policy inconsistency and contradictory approaches have sent mixed messages to the investment community about the direction of travel. Examples of this include: claiming to want to decarbonise at lowest cost while simultaneously halting onshore wind; giving local people a say in wind consents but not shale gas; and emphasising the important role of gas while scrapping support for carbon capture and storage.
DECC has been clear on its policy priorities. We are committed to providing secure, affordable and clean energy that our families and businesses can rely on now and in the future. Doing this is critical for our economy, national security and household budgets.
We need to bring about the transition to low-carbon energy generation as cost-effectively and securely as possible, and the Secretary of State has made clear that our generation strategy is based on delivering more offshore wind, nuclear and new gas, to ensure a secure supply of energy.
Continuing to provide subsidies to the same technologies will not be sufficient to reach the Government’s commitment to reduce emissions by at least 80% by 2050 from 1990 levels. As well as delivering on our manifesto commitment to end new subsidy for onshore wind, we are clear that we need to continue investing in less mature technologies, so that they are able to realise their potential, as solar and onshore wind have done. For this reason, DECC is doubling its spend on early stage research and development to £500m by 2020, alongside other international partners and private sector individuals within the Mission Innovation initiative launched at COP21 in 2015.
Conclusion 5
The lack of a long-term vision has made it more difficult for investment committees to make decisions about projects that are, by their nature, long-term endeavours.
The UK’s Climate Change Act provides a long-term decarbonisation target and five-yearly carbon budgets that provide certainty for investors beyond political cycles.
The Secretary of State’s November 2015 speech also set out a clear direction for energy and climate change policy over the course of this Parliament. In her speech, the Secretary of State set out her vision and made key commitments to offshore wind support, new nuclear, building new gas-fired power stations, and a focus on innovation. Over the course of this year we will provide more detailed information on how the offshore wind and the reformed capacity market auctions will work, to provide even greater clarity.
In addition, DECC published its Single Departmental Plan (SDP) on 19 February 2016, providing a clear statement on the Department’s policy direction. The SDP sets out the Department’s strategic objectives and policy priorities alongside a plan for delivery and a set of headline performance metrics to monitor progress.
Conclusion 6
A policy “cliff-edge” in 2020, does not provide sufficient visibility about the size of the future Levy Control Framework (LCF) budget or what will happen to the Carbon Price Floor. This is a problem when projects can take five years or longer to go from conception to completion.
The Government will clarify the future of the cost control framework for low carbon energy in due course. However, we are already making clear how funding will be made available for key technologies.
DECC has announced that £290m of annual support will be made available for offshore wind from 2021/22 onwards. We are also setting out our expectations for cost reductions in the offshore wind industry, ensuring that investors have long-term visibility and understand what levels need to be achieved to secure ongoing subsidy support. Support costs for offshore wind will be capped at £105/MWh for projects commissioning in 2021/22 and are expected to cost below £85/MWh by 2026 (2011/12 prices).
Furthermore, at Budget 2016 the Chancellor announced that Carbon Price Support rates would increase with RPI in 2020/21, with a further announcement on the longer term future of the Carbon Price Floor to be made at Autumn Statement 2016.
We are also in active negotiations with developers on new nuclear projects to provide secure baseload energy for the UK with plants expected to be built in the second half of the 2020s and are in the process of setting out our plans for the next Capacity Market auction to run at the end of this year.
Recommendations
Recommendation 1
The Committee recommends that DECC provides further clarity on how existing policy mechanisms will be used, particularly the LCF beyond 2020 and details on CfD auctions.
The Office for Budget Responsibility published the most up to date Levy Control Framework projections on 16 March 2016, and as highlighted above, an additional £730m of annual support has been confirmed for this Parliament for less established technologies including offshore wind commissioning between 2021/22 and 2025/26. We will set out more information in due course on the next CfD allocation round for less established technologies, which we intend to hold by the end of 2016.
Recommendation 2
The Committee recommends that DECC creates a credible long term vision for the future of the UK’s energy system and considers the idea of a ‘Carbon Plan’ to deliver the fifth carbon budget.
As highlighted earlier, the Secretary of State set out her vision and clear priorities for this Government’s energy policy in November. We are committed to ensuring the success of these priorities over the course of this Parliament.
We had already announced that we will publish our Emissions Reduction Plan by the end of 2016, which is the successor to the 2011 Carbon Plan. The Emissions Reduction Plan will set out our policies and proposals for meeting the UK’s carbon budgets. DECC will continue to engage closely with other Government Departments on the development of this plan over the coming months.
Recommendation 3
The Committee recommends that DECC pays particular attention the LCF, ensuring that it is fit for purpose and addresses issues surrounding lack of transparency.
DECC is committed to keeping energy bills low, encouraging further investment in the energy sector and creating opportunities for industry jobs across the UK.
As set out earlier in our response to Conclusion 2 above, DECC has shown transparency by publishing details of the assumptions which underpin the LCF modelling, consistent with protecting commercially sensitive information. Strike prices for signed CfDs are available on the LCCC website. Renewables Obligation and FITs Scheme deployment data are published monthly on the Renewable Energy Planning database and the Ofgem website.3
In addition, DECC regularly monitors changes in wholesale fossil fuel prices and the impact on support for renewable energy.
1 Calculated on the basis of January 2016 LCF projections, as used in the OBR’s March 2016 Economic and fiscal outlook. http://budgetresponsibility.org.uk/docs/dlm_uploads/Fiscal_supplementary_tables_March_2016.xls
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14 October 2016