A New White Paper on Energy and Climate Change: Cunning plan or recycled paper?

Transcription

1 A New White Paper on Energy and Climate Change: Cunning plan or recycled paper? So now we have it. On Sunday Ed Miliband was on BBC television, agreeing with the Prince of Wales assessment that we have 96 months to address climate change. Today, the Government has released its definitive statement on energy and climate change policy for the 21st century: The UK Low Carbon Transition Plan (the White Paper ). This is part of a package of publications, including the final Renewable Energy Strategy ( RES ), which put flesh onto the bones of a plan to decarbonise the energy sector and secure our energy supplies. The same familiar themes feature: tackling climate change and ensuring security of supply while keeping costs down. We have heard some of this before, so what has changed this time and what will it mean for business? Contents The size of the task 1 Power: keeping the lights on without frying the planet 2 An incentive for green heat at last 4 Transport: greening the sector but too little, too late? 5 More opportunities, a cunning plan, but not much on cost 5 Conclusions 6 The size of the task The three key drivers behind this activity are: the UK s own commitment to reduce carbon emissions by 80 per cent against 1990 levels by 2050 and its shorter term commitment to reduce emissions by 34 per cent by 2020 the EU s new climate change package under which the UK is fixed with an ambitious target: to source 15 per cent of its energy consumption from renewable sources by Member States must reduce their 15 July

2 greenhouse gas emissions by a minimum of 20 per cent against 1990 levels (potentially, 30 per cent, in the event of equivalent commitments by other OECD countries in the Copenhagen negotiations) and must source 10 per cent of their transport fuels from renewables by the same date and the G8 s agreement last week that emissions should be reduced to two tonnes per person per year by Each of these has in turn been prompted by the gathering mass of evidence that tackling global warming is not so much urgent as long overdue and that we are running out of time to engage. The White Paper takes the power, heat, transport, domestic, commercial and agricultural sectors in turn and looks at what s to be done in each. The approach is the same: cut emissions by reducing demand and supporting non-fossil fuel technologies while keeping the inevitable costs down and maximising the business opportunities for UK plc. Power: keeping the lights on without frying the planet The UK now relies on fossil fuel for about 75 per cent of its generation. By 2020, about 40 per cent of power consumed in the UK must come from renewables, nuclear and clean coal (i.e. carbon capture and storage ( CCS ) not just supercritical technology). We will need a transmission grid with more capacity and the ability to manage greater fluctuations in supply and demand. All this must be achieved in astonishingly short order and without threatening supplies. How? A bigger, better RO On top of the changes made earlier this year to the Renewables Obligation ( RO ) principally, banding technologies to offer different levels of support the RO is to be expanded and extended to support the massive upswing in new renewable generation needed in the next 11 years. In response to concerns that revenue volatility, especially in a difficult financing climate, is hampering deployment, the Government is floating the notion of a price stabilisation mechanism to pass price risk to suppliers. The idea is that this will take the form of a contract for difference on the wholesale power (and possibly also, the Renewable Obligation Certificate) elements of a generator s revenue, entered into with a new Government agency which will then pass risk onto suppliers through the licensing regime. This could boost new build rates and reduce cost, though the idea will no doubt generate some debate, particularly if it is to be mandatory. Meanwhile, the Government is rethinking support levels for some technologies. The new banding levels were based on evidence gathered 2 15 July 2009

3 during heady pre-credit crunch days when raising finance was easier and the sterling exchange rate more favourable. In light of the Government s recent confirmation of its support for a further 25GW of offshore wind, the current emergency review of banding for offshore wind looks like a favourable precedent for flexibility in the future. Additional support for tidal and wave power is also being considered. One counter-current to this positive message is that the Government, no doubt daunted by the size of the UK s renewable energy target, is to amend the RO to include one of the mechanisms provided in the Renewable Energy Directive for allowing other countries renewable electricity to count towards individual targets. The change is being played down at this stage as being a safety net only; ostensibly, the plan is still for the UK to hit its target entirely through an uplift in domestic renewable generation. However, market participants will no doubt be concerned as to whether this signals any weakness in the Government s resolve. A FIT at last: clean energy cashback The idea of simpler support for small scale renewable generation has taken hold. The Government caved in to pressure when the Energy Bill was being finalised late last year and included the power to implement a feed-in tariff ( FIT ) for generation of up to 5MW capacity. The design and implementation of the new FIT is now out for consultation before its scheduled introduction in April next year. No new support for conventional alternatives or nuclear but a boost for CCS Gas fired, but above all nuclear and clean coal generation, continue to feature prominently in the Government s energy strategy. About 25 per cent of the UK s existing generation capacity is scheduled to shut down by On the most optimistic projections, neither marine renewables nor CCS will make much impact before then and nuclear will be very challenging. The short term gap will need to be filled largely by wind, biomass, gas- and coal-fired plant (the latter in line with the Government s new, tougher, consenting regime to support CCS). Reliance on gas imports will need to be reduced over time but cannot be eliminated immediately and competition for liquefied natural gas is likely to be intense. Despite this, the White Paper considers that the risk of supply interruptions over the next decade remains relatively low. The Government has so far declined to follow up its stated preference for a more interventionist energy policy with anything as firm as targets for the UK s generation mix. However, there must be a risk that the sheer cost of offshore wind in particular will render the top end of the Government s growth ambitions for the sector unattainable in the time, creating demand that must be filled by the conventional plays. A New White Paper on Energy and Climate Change: Cunning plan or recycled paper? 3

4 Publicly at least, Government remains firm in its belief that the additional fossil fuel capability required remains economically viable despite increased support for renewables. Gas-fired generation may see a window of opportunity open up until nuclear and CCS can make a major contribution but is likely to encounter greater economic challenges later in the next decade, especially if, as predicted, carbon costs continue to rise and fuel security concerns persist. Only CCS is in line for a financial boost, via a new mechanism now out for consultation and due to come into force next year but large scale commercial deployment still looks some way off. Nuclear is the obvious answer to fill the low-carbon gap without opening up energy security concerns. Major nuclear players like EdF have been insisting for some time that the UK s plans are unsustainable without some form of support. The CBI has weighed in this week with a call for a wider focus on low-carbon alternatives such as nuclear. Any new price stabilisation mechanism for renewables would have obvious potential for expansion into other low carbon technologies. There is no narrative yet on how the eventual upswing in electricity demand from transport will be met. Ensuring significant uptake of electric vehicles and further electrification of the railway network may not be on this Government s short term To Do list but the sector is evolving quickly and their impact on the size of the UK s generation portfolio post 2020 could be enormous. A grid fit for purpose Significant investment in the transmission grid is going to be required to absorb the upswing in renewable generation; recently estimated at a further 4.7bn. Under the current regulatory regime, transmission owners wait for a formal request from a generator before they carry out new grid connection. Once connected, the right to use the grid is granted on a fixed, inflexible, basis. This approach is not going to work in this new world, with a large backlog of onshore generation waiting to connect and a bigger generation portfolio that will involve significant intermittency as more and more is driven by wind. Ofgem is to finalise by next winter a new enhanced investment incentives regime to encourage investment in the network ahead of generator requests. An interim regime to speed up grid connection was announced earlier this year. The long term regime which will replace it looks likely to be pushed through later this year by Ed Miliband, using his statutory powers. An incentive for green heat at last Financial support for renewable heat will come in the form of a new Renewable Heat Incentive ( RHI ), due for implementation in How 4 15 July 2009

5 effective it will be remains open for debate. The renewable heat sector is now almost non-existent and many of the players in it will be very small scale. There is more to do here. Transport: greening the sector but too little, too late? The new EU target that 10 per cent of transport fuels (road, rail, aviation, shipping) be renewable by 2020 will be met mainly through biofuels. Technological advances in electric and hydrogen fuelled vehicles and electrification of the railways just won t happen quite in time. Meanwhile, the biofuels industry is engaging with how best to address questions over sustainability. The UK s Renewable Transport Fuel Obligation ( RTFO ) currently requires that 5 per cent of transport fuels come from biofuels by The RTFO will need to be beefed up to bring it into line with Brussels expectations. New legislation is expected late next year and is sorely needed. Without a long term regulatory framework to create a solid market for biofuels, it is hard to see how operators will be willing to invest at scale here. Aside from this, the White Paper package presents few new ideas in this area. Rail franchisees struggles to make ends meet and the hole this will leave in the budget for network improvements will not help. There is no doubt that the transport sector will have to be radically overhauled - the Government is aware of this and is playing catch up, but the time is not yet right. More opportunities, a cunning plan, but not much on cost As media coverage before the White Paper s publication pointed out, significant increases in domestic and industrial energy bills are expected by New measures account for roughly half of these increases but won t kick in until after No doubt, the Government will be crossing its fingers and hoping that, by then, consumers will be more willing to bear the pain. Given the economic environment, this requires a clearer more consistent communication programme on climate change and energy security than we have yet seen. The Government is quick to point out that the cost of saving the planet will to some extent be balanced by the economic benefits of new business opportunities in the green sector. Other countries have developed extensive green stimulus programmes. The White Paper claims for the UK a 3.5 per A New White Paper on Energy and Climate Change: Cunning plan or recycled paper? 5

6 cent share of a 3 trillion global low carbon and environmental market and claims that by 2015, the UK s increased share could be worth 150bn. The Government puts the total cost of its White Paper policies at about 25-29bn. The package is largely silent on where the additional investment will come from, apart from making clear that the private sector (and hence consumers) will largely foot the bill. Conclusions The UK has committed itself to a revolution in energy and transport which will bite with increasing intensity over the next few years. Few sectors will remain untouched. This week s publications provide the first opportunity for a while to understand the Government s across-the-board thinking on energy and climate change policy. It is true that there is little here that is wholly new. Most initiatives have been at least trailed in draft, if not implemented some time ago. Others remain merely open for consultation. While projections made over several decades can only be educated guesswork, assumptions have been made that even now may be challenged. That said, we have the glimmerings of a plan, and given the latest outputs from the scientists, that is obviously better than no plan at all. Pivotal questions remain. Perhaps the biggest are: Are we placing too much faith in ambitious delivery targets for renewable power? Should we look again at support for other low carbon and fossil fuel alternatives? Have we taken sufficient account of future demand increases as climate considerations push energy consumption towards the electron and away from fossil-based alternatives? How will the transport and heat sectors play their part fast enough to contribute to the 2020 renewable energy target? How can we deliver the potential energy savings available from industry and residential energy efficiency measures? In a capital constrained environment, will the private sector be able to raise all the capital required? Can these costs all pass through to consumers, or is something needed from taxpayers? Do fuel poverty initiatives do enough to rebalance this? How and when will these policies be sold to hard-pressed voters? It would have been good, though possibly wishful thinking at this stage in the cycle, to have had answers to these difficult questions. The questions, though, will not go away July 2009

7 For further information, contact: John Pickett Partner, Energy & Infrastructure Direct line: Mobile: Vanessa Havard-Williams Partner, Environment & Planning Direct line: Mobile: A New White Paper on Energy and Climate Change: Cunning plan or recycled paper? 7

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