Caught between a ROC and a hard place
Last week’s report from the Committee on Climate Change was not the first warning the Government has received about the uncertainty that still surrounds its Electricity Market Reform (EMR).
It’s something SSE and a number of others have commented on repeatedly, but the CCC report was particularly frank in its assessment of the impact of the current policy situation on low-carbon investment. It said:
“The currently high degree of uncertainty about development of the power system beyond 2020 threatens fundamentally to undermine the EMR. Unless this is addressed, projects coming on to the system before 2020 are likely to be at high cost and there could well be an investment hiatus for projects coming on after 2020.
“Therefore, Government action is necessary to resolve these uncertainties in order that the UK can gain maximum economic and employment benefit from the move to a low-carbon economy.”
Perhaps most interestingly, the CCC has set out – ahead of the report stage of the Energy Bill next week – five measures it says should be put in place to “improve conditions for investment”:
• Set in legislation this Parliament a target to reduce the carbon intensity of power generation to 50 gCO2/kWh by 2030, with some flexibility to adjust this in the light of new information.
• Set out strategies to support the development of less-mature technologies through to competitive deployment.
• Extend to 2030 provisions for the funding of low-carbon technologies (i.e. “the Levy Control Framework”).
• Publish in the Delivery Plan the amount of capacity that the Government intends to contract over the period 2014/15-2018/19, and prices that it will pay for onshore and offshore wind.
• Set out options to support mobilisation of new sources of finance, including roles for the Green Investment Bank and Infrastructure UK.
While we don’t necessarily agree with everything in the report, these are all sensible measures in principle and would provide investors with far greater certainty over energy policy direction from 2020 to 2030.
The 2030 decarbonisation target, for instance, has been the main focus of the public debate about the Energy Bill so far and is likely to be so again with MPs taking part in a critical vote next Tuesday on whether to include one in the Bill.
We are very much in favour of a target and have made several public statements to that effect. However, neither this nor any of the measures outlined by the CCC do enough to overcome the more immediate, short-term problem facing low-carbon investment.
As the CCC says, uncertainty around EMR – and specifically the transition from the Renewables Obligation (RO) support system to Contracts for Difference (CfDs) – is leading to an investment hiatus in low-carbon forms of generation, which is more or less the exact opposite of what EMR is supposed to be achieving.
The cliff edge has been created by the 2017 cut-off date for projects to receive support under the RO. Any developer who is uncertain that their project will be in a position to generate before then (which is already the case for some) will simply not be able to make an investment decision until the new CfDs have proven robust.
This will impact on offshore wind investment decision from this year, and the clock will soon be ticking on technologies with shorter lead times, like onshore wind. And it won’t just affect decisions to construct; it will also impact on decisions to invest in developing larger projects.
Due to their complexity and state aid hurdles that will need to be overcome, we don’t believe CfDs will investable until 2016 at the earliest, and the investment contracts put forward by the Government as an interim measure do nothing to change this. There appears to be a belief in government that investment will come no matter what and that it’s just a question of channelling it towards the right places. But the reality is that not investing at all is becoming an increasingly attractive option for investors.
The CCC report rightly highlights that there is a desperate need for policy certainty beyond 2020 to convince investors that there is a stable, long-term market for low-carbon technologies in the UK. However, unless action is also taken to keep investment flowing over the next few years, the damage may already have been done. Manufacturers will choose to build their factories and set up their wider supply chains elsewhere.
There is a very simple solution: extend access to the RO beyond 2017 to enable investment to keep flowing while the credibility of CfDs is being established. If we don’t, there are plenty of other places that investment can go. Can the UK afford to miss the boat (again)?