UK: Spending Review 2010: Swings And Roundabouts For The Renewable Energy Sector?

Last Updated: 26 October 2010
Article by Humphrey Douglas and Harkeert S Riyat

The chancellor, George Osborne, has outlined the Government's spending plans for the next four years, including those for the Department of Energy and Climate Change ("DECC"). With announcements on topics ranging from feed-in tariffs to the Green Investment Bank, industry experts will be analysing the detail behind the headlines. Energy minister Chris Huhne claims: "Like the rest of the public sector we have taken some tough decisions, but we remain on course to deliver on our promise to be the greenest government ever".

Key points from the Spending Review 2010 for the renewable energy sector

  • £860m – To be spent on the Renewable Heat Incentive over the next four years
  • FITs – Efficiency will be improved at the next formal review, rebalancing it in favour of more cost-effective carbon abatement technologies
  • £1bn – To be spent on the UK's CCS demonstration plant
  • £200m – To be spent on developing new green technology, including offshore wind and developing port infrastructure
  • £1bn – To be spent on funding the Green Investment Bank
  • Green Deal – To be implemented, however, the Warm Front public spending programme to be phased out
  • Carbon Reduction Commitment Energy Efficiency Scheme – Revenue raised through the scheme will not be given back to participants but used to support public finances
  • 5 per cent – Average yearly fall in DECC's budget

Renewable heat incentives

For many, perhaps the biggest relief was confirmation that the Renewable Heat Incentive ("RHI") is still due to be introduced in June 2011 with £860 million of funding being set aside for the scheme. However, it seems details are yet to be provided as to which technologies will definitely be eligible to take part.1

The Government expects RHI investment to drive more than a tenfold increase of renewable heat over the coming decade. Contrary to the previous government's plans, a renewable heat levy is no longer planned to fund the scheme. Use of taxpayers' funds generally, rather than adding a FIT-style increase to fuel bills, is no doubt intended to avoid a weary response to the RHI, which is generally regarded as a particularly efficient carbon abatement incentive, and hence is deemed worthy of taxpayer funding.

Feed-in-tariffs

As the spending review left current FIT rates untouched until the next formal review (currently scheduled to take place in 2012, with any changes currently likely to become effective from April 2013), concerns from some quarters that the spending review may have even retro-actively eroded current FIT rates, were perhaps significantly allayed. Those that install and register their FIT-compliant developments quickly enough, should therefore still benefit from the current FIT rates for up to 25 years, under the current regulations.

The Renewable Energy Association's ("REA") PV Specialist Consultant, Ray Noble, apparently said of the review: "This is excellent news for the UK solar industry. It's exactly what the market needs in order to fulfil its fantastic potential. The outcome of today's review could not have been better."2

However, FIT-reliant technology manufacturers may be concerned in the longer term by the spending review statement made, that the efficiency of FITs: "will be improved at the next formal review, rebalancing them in favour of more cost-effective carbon abatement technologies."3 It perhaps remains to be seen for example whether Solar PV manufacturers and others will be able to drop their unit prices in time to compete with some of the lower technologies available and whether, if they do, FIT support will still be meaningfully available for them going forward.

It is worth noting that the press release accompanying the spending review did note that degression (reduction of FIT rates) will be implemented at the first scheduled review of tariffs: "unless higher than expected deployment requires an early review". It is understood that this means that FIT rates could fall earlier and more quickly if there is deemed to be a high take-up of FIT installations.

The Government has also confirmed that support for lower value innovation and technology projects will be reduced, saving £70 million a year on average over the spending review period, although no further details of targeted technology were set out.

Carbon capture and storage

Notwithstanding that some in the industry considered a scaling back of support in relation to carbon capture and storage ("CCS") was inevitable, the Government confirmed that up to £1 billion will be invested to create a commercial scale CCS demonstration plant with a commitment to provide funding for four further CCS demonstration plants in due course.

Electricity customers will be pleased to note that funding will be provided, initially at least, from general public spending and so does not currently require the introduction of a further levy on electricity supplies. However, the Government will decide whether to introduce such a levy in spring 2011.4

Offshore wind

£200 million is intended to be invested in low carbon technologies including (i) manufacturing facilities at port sites and technological innovation to support the development of offshore wind power; and (ii) energy efficiency technology for buildings.

Green deal

The Government pledged its support for the Green Deal which will allow householders to improve the energy efficiency of their house at no upfront cost, repaying costs from the savings they make on their energy bills, through a Green Deal. Although no further details were published during the spending review, it is understood that current, early stage plans by DECC include new legislation to create a new legal mechanism allowing the obligation to repay the costs of energy efficiency measures to attach as a legal charge to an energy bill at a property, rather than to an individual. The obligation to pay would then pass to the new bill payer should the applicant move home.

In the meantime, the Warm Front public spending programme will be phased out saving £345 million by 2013-14.5 From April 2011, energy suppliers are due to provide greater help with financial costs of energy bills of the most vulnerable fuel poor households, through Social Price Support.6

The Carbon Reduction Commitment Energy Efficiency Scheme ("CRC")

The changes announced in relation to CRC are said to represent a significant U-turn for the Government and is particularly significant for some qualifying medium to large businesses who may have been hoping to recoup some of their CRC-related investment. The CRC requires organisations to buy permits to cover the greenhouse gas emissions from their energy use and hence is intended to incentivise fuel efficiency. CRC proceeds were going to be handed back to participants, rewarding those that cut the most carbon (and in effect penalising those that cut the least). However, the Government has confirmed the revenue raised by the scheme will instead be used to support public finances. Some commentators have so far reacted by deeming this measure to effectively make the CRC more akin to a carbon tax for the 20,000 or so large public and private sector organisations that are likely to be involved in CRC.

Other announcements

Other announcements included:

  • the initiation of an independent review of the fuel poverty target and definition before the end of the year;
  • the continuation of capital funding for the Nuclear Decommissioning Authority with spending on the highest hazards being protected; and
  • the setting aside of £1 billion for the funding of a Green Bank (which is significantly less than the £4 to £6 billion called for by industry).

Overall, the total resource available for DECC will fall by an average 5 per cent a year. However, there will be an increase in capital spending, partly to meet unavoidable commitments on nuclear decommissioning.

Conclusion

Confirmation that the Renewable Heat Incentive will be introduced in 2011 will reassure many critics of the cost-effectiveness of some FIT technologies. However, those who have already started investing for the longevity of the FIT will be concerned that the FIT system looks like it will be rebalanced in favour of more cost-effective carbon abatement technologies without clarity as to which FIT technologies may become less favoured. It could mean for example, favouring lower-tech RHI technologies (like heat pumps and solar thermal) which capture, store and use the sun's heat, as heat (for building space heating) rather than some FIT technologies used to produce electricity, which by the nature of conversion of wind and solar radiation for example, are perhaps perceived as less cost-effective. It seems the Government will be picking technology winners in the future which may mean uncertainty for FIT projects not registered with the FIT scheme and installed prior to any changes taking effect.

For medium to large businesses the most important announcement is likely to be the fact that revenue raised by the CRC will not be returned to participants, but instead goes towards supporting public finances.

Footnotes

1 http://www.decc.gov.uk/en/content/cms/consultations/rhi/rhi.aspx.

2 As quoted on Solar Power Portal on 20 October 2010.

3 See paragraph 2.104 of the Spending Review 2010.

4 See paragraph 2.101 of the Spending Review 2010.

5 The Warm Front programme will have a budget of £110 million in 2011-20 and £100 million in 2012-13 after which support for heating and insulation for the most vulnerable will be delivered through the Green Deal for energy efficiency and a new obligation on energy companies.

6 Support will total £250 million pounds in 2011-12 rising to £310 million in 2014-15.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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