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Go slow on renewables

By Dave Elliott

‘Moving too quickly to zero carbon energy risks driving the bills of hardworking people too high’. That, from Energy Secretary Amber Rudd, in a DECC Blog on August 11th , seems to be the view underlying the government’s renewable energy support cutbacks. In her speech to the Conservative Party Conference in October she said that ‘as we have already shown, we will be tough on subsidies’, but insisted that the policy was fair since it simply was aimed at ‘getting the balance right between supporting new, low carbon generation and protecting bill payers’:

That seems a little odd given the significant support that has been offered to shale gas projects and the Hinkley nuclear project, neither of which seems likely to deliver any energy for some time, even with luck. So, if renewables were to be left to sink or swim, what was her medium-term plan? Her starting position seems to have been to blame the Levy Control Framework budget overruns on her Liberal Democrat predecessors – their policies had forced her to slash spending, she claimed:  But now things were on a even keel.

Interestingly, Greg Barker, a Tory ex-DECC Minister, who had been a major supporter of PV, didn’t agree: he saw her proposed PV cuts as ‘catastrophic’ and said ‘solar needs a bold plan, not just pruning shears’ (The Times 15.10.15). Although he too wanted cuts:DECC should end all subsidies for large-scale solar farms at the end of this financial year, and focus the remaining budget on consumers, specifically roof-mounted systems on homes, factories and community schemes. Then rather than stretch the subsidy out to 2020, it should end subsidies for solar altogether by 2018 and replace subsidy with net metering. This needs to be coupled with a new government scheme to support batteries in homes for use with solar panels, utilising unspent money from the DECC’s innovation budget’.

The Solar Trade Association, while accepting that the aim was to get off subsidies, argued for something less aggressive than an 87% cut. It outlined an emergency solar rescue programme which it said would add £1 extra per consumer per year in subsidies by 2019, while noting that this would be cheaper than supporting the Hinkley nuclear project:

There were also proposals from UKERC/ICEPT (the UK Energy Research Centre’s Imperial College Centre for Energy Policy and Technology) for ‘simple steps to maintain investor confidence, boost innovation and reduce costs in the UK power sector’. It said that a full ‘reset’ approach, with new support systems being introduced, was ‘unnecessary’ and would ‘create delays to investment, increase political risks, and hence costs to consumers’. It argued that ‘the government already has the levers it needs to encourage investment in a secure and lower carbon system. Policy can be made more effective by providing investors with greater clarity and a longer term perspective, using the policy framework that is already in place’. For example, ‘Auctions for Contracts for Difference (CfDs) have already brought forward significant reductions in the prices paid to low carbon generators. CfDs could be moved progressively to a technology neutral basis, combined with price caps to bear down further on costs.’

If it was done comprehensively, with nuclear included on the same competitive terms, some of the current imbalances should be removed, but it is still not clear that trying to use one mechanism to support such a wide range of technologies at different stages of development makes sense. It had in any case proved necessary to add another mechanism, the Capacity Market, to ensure balancing. That also has problems: it lumps a wide range of grid-balancing options together, with uneven results. The Imperial paper did accept that a better approach is needed to balancing project assessment: ‘Over-simplistic analyses that suggest that variable generation should ‘bid as firm power’ (which implies dedicated back-up) will lead to a sub-optimal and over-expensive power system. This is because demand response, flexible generation, storage and interconnection offer benefits to the system as a whole and building them as if they need to be dedicated to each specific variable renewable installation will result in over-investment. System costs should be charged to generators as cost-effectively as possible, but on the proviso that they are assessed at a system-wide level rather than on an assumption that variable renewable installations need to self-balance.’

The Imperial paper was also unhappy with simple carbon pricing approaches: ‘Carbon price support cannot offer the same degree of investor security as a legal contract through a CfD’. It claimed that ‘to be effective in promoting zero carbon power, carbon pricing requires that the cost of all energy rises to the cost of the marginal least-cost low-carbon option – otherwise no low-carbon generation can possibly be built. This is more expensive for consumers than targeted payments to low-carbon generators.’ So stick with the CfD – along with infrastructure strategy, and support for innovation.

Fair enough, but CfDs don’t help innovation – there is a race to the lowest prices, as in the idea of aiming for ‘subsidy-free’ CfDs. Innovation requires a different, often longer term, R&D support approach, and also support for pre-commercial developments in niche markets. This can take time, as can effective commercial deployment and wider market diffusion – perhaps decades. Neither can easily be rushed. Lest that seem too conservative (given the urgency of change!), what the Imperial team seemed to be resisting was the belief, which apparently underpinned the proposed Global Apollo programme, that more R&D was the answer. Imperial says ‘a substantial move to refocus energy policy on research-led innovation at the expense of market creation is unlikely to accelerate innovation and could prove counter-productive’. So, while R&D is necessary, focus mainly on CfDs:

In the event, in her much anticipated ‘energy market reset’ speech, Amber Rudd didn’t agree: ‘Energy research and development has been neglected in recent years in favour of the mass deployment of all renewable technologies. We do not think this is right’. However she added ‘we cannot support every technology. Our intervention has to be limited to where we can really make a difference – where the technology has the potential to scale up and to compete in a global market without subsidy. DECC  funding for innovation is already supporting the development of transformative technologies here in the UK. In energy storage, in low-carbon transport fuels, in more efficient lighting.’ And ‘we must also build on our rich nuclear heritage and become a centre for global nuclear innovation’ – including for Small Modular Reactors.

This was, in microcosm, the same pattern as in her wider policy proposals, which I will cover in my next post – extra market support for most renewables could now end, offshore wind possibly apart, but nuclear and new gas needed more. With coal to go, something of a market reset, but not much, just what she called ‘a course correction’. And no clarity on whether, given the cuts, the UK will be able to meet its 2020 renewable target, just a promise of a new CfD round by the end of next year, still leaving a big gap on green heat policy:

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