28 November 2016

Johnny Gowdy will be speaking at Renewable Futures on 29 November in Bath. There are still tickets available, please book here.  

The government has published a lessons learnt report, produced by Tom Kelly, previously a non-executive director at DECC, and its response to the criticism it has faced in allowing the Levy Control Framework (LCF) budget to be overspent.

The report was written in 2015.  It has been issued on 25th November 2016, after the relevant department has been abolished, on “Black Friday” afternoon, one of the busiest shopping days before Christmas when you were probably in the pub. You can probably guess that it is not particularly complementary.

However, amongst the criticism one senses a degree of departmental hand-holding going on here. To avoid any wider fallout the report (with hindsight) is keen to pin the blame for the LCF overspend on three factors:

  • The fall in the wholesale price due to the unexpected fall in fossil fuel costs;
  • Technological advances leading to higher capacity factors mainly in wind;
  • Surge in last minute installations under the RO and FIT legacy schemes.

The children were left in charge – apparently.

The critical problem highlighted by Tom Kelly was not decision making per se, but a lack of monitoring and control procedures in place; and a misplaced faith in underlying assumptions combined with a degree of “group–think” that pervaded DECC and its consultants during the period.

 “Assumptions around forecasts were made by analysts, technology and commercial experts at a relatively junior level and the dynamics underlying those assumptions are not sufficiently understood and internalised at a senior level by those accountable for the oversight of the programme as a whole.”

The report does not mention a couple of more awkward factors which really should have been anticipated, for example;

  • The role of renewable energy in reducing wholesale prices through the merit order (marginal cost) effect. This impact, which was identified and predicted by the department formerly known as DECC as early as 2012/13, really ought to have been built into the LCF mechanism, and arguably ought to have resulted in a LCF budget uplift; since falling wholesale prices caused by renewable deployment, would offset the increased consumer cost to support the levy

There is a recognition that the high allocation of LCF budget for FID Enabling for Renewables has provided an element of certainty to DECC in meeting 2020 EU renewable energy target. However, there is real concern in the market that this may have endangered the credibility of the enduring CfD regime.” Grant Thornton 

Was the projected LCF overspend really the problem or was it just about getting rid of the “green crap”?

There are many in the industry who are wondering whether there will be an LCF overspend at all.

A key point made by the report, which I think we would all agree with, is the lack of transparency regarding the LCF budget calculation and projection. This meant that, not only was industry left in the dark about the available budget, but critically the industry and other independent analysts were unable to identify and highlight to government that it had got its assumptions wrong (or maybe they were right).

We still don’t have a clear picture of what overspend is projected for the current delivery plan period. The Select Committee on Energy and Climate Change and even the Office of Budget Responsibility have been left in a quandary. It thought we are on course for an overspend but frankly it has no idea because of the “opaque” nature of the calculation. The OBR has itself revised its estimate of LCF expenditure downwards from £9.1 billion in 2020/21 as forecast in July 2015 to £8.4 billion in November 2016. The revised figure is now within the 20% “headroom” on the original budget of £7.6 billion.

Ed Davey, former Secretary of State at DECC, has been adamant the whole LCF budget overspend is a myth based on some dodgy calculations which have been politically motivated to undermine the renewable energy sector. He is also adamant that far from being complacent, DECC was well aware that falling wholesale prices would impact the CfD component of LCF expenditure and had approached Treasury to request that additional flexibility be built into the LCF calculation on the basis that falling energy costs ought to accommodate a higher levy.

The real cost should be measured in business closures, lost jobs and lost opportunities

To many in the renewable energy sector, and those of us concerned about climate change, the ongoing debate about whether the LCF is overspent misses the point. The world has now passed the 400ppm threshold for carbon dioxide in the atmosphere and the UK is not going to meet its 2020 renewable energy targets, surely these are bigger concerns. The fact that renewable electricity generation has been deployed more quickly than anticipated, against a backdrop of improving technology and rapidly falling renewable energy costs, should be a cause for cheer. 

The fact that so many businesses, investors, communities and householders responded to the government’s strong signal that the low carbon economy is here to stay should be considered a great strength of the UK economy, and a potential foundation for a new low carbon industrial strategy.

The cost of the projected overspend - which the BEIS Lessons Learnt report calculates at £12 per household per year (while bills are projected to fall overall by £147 per year), is surely a small price to pay to both combat climate change and keep the UK’s growing low carbon sector on track.

Of course it is right that subsidy levels be reduced in line with falling costs but this is not what has happened. Instead, the brakes have been slammed on. Whether politically motivated, or just convenient, the government’s knee-jerk response to the LCF overspend projection has resulted in a massive drop in renewable energy and energy efficiency deployment.

In real terms this has resulted in hundreds of business closures and thousands of job losses. How many business and jobs have been lost is hard to tell – these companies do not close with a fanfare nor do they provoke much hand-wringing in Westminster. Instead they go quietly into the night, but they are real jobs and real people and, especially here in the south west of England, they represent exactly the sort of higher skilled and higher productive jobs that we have spent over a decade trying to generate.

Lessons learnt?

If there is a lesson to be learnt, and this pertains to the upcoming Brexit, it is that we should not assume that government has all the answers. Transparency, proper consultation and ongoing dialogue with stakeholders is a pre-requisite of good policy making.

Meanwhile, we look forward to future ‘Lessons Learnt reports’: The Green Deal, Carbon Reduction Commitment, smart meter roll out, privatisation of the Green Investment Bank, ECO measures, withdrawal of support for  marine energy technology development, the Capacity Market and the unintended consequences of changes to embedded benefits would all be potential topics.

 

Author: Johnny Gowdy

Contact: Jgowdy@regensw.co.uk