David Cameron’s promise within his first month as UK prime minister to be “greenest government ever” looks at risk of derailment – by his own Chancellor, George Osborne.
Conservatives and Liberal Democrats appeared to carry over the political consensus on action on climate change and a switch to renewable energy. But what began as an ideological rift in the British Cabinet has become a very public clash between the Tory chief at the Treasury and the Lib-Dem boss at the Department of Energy and Climate Change.
Osborne fired warnings shots early in the year with the absence of any substantial support for renewables in his second budget as the UK’s finance minister. The budget announced a strategy for gas generation to be unveiled this autumn, which could turn the UK into a “gas hub” with £500 million in tax breaks to create incentives for investments in marginal gas fields.
Then followed two major announcements that will be critical to the evolution of the UK’s energy sector through to 2030.
Davey launched the UK’s draft energy bill in May and in July announced new rates of subsidies for large-scale renewables that will be effective from 2013 to 2017. The energy department estimates that the new rates of Renewable Obligations would attract up to £25 billion of new investment in the economy.
Renewable energy will create a multi-billion pound boom for the British economy, driving growth and supporting jobs across the country,” said Davey.
“The support we’re setting out today will unlock investment decisions, help ensure that rapid growth in renewable energy continues and shows the key role of renewables for our energy security.”
The Vestas Global Consumer Wind Study data found that Davey’s approach on energy is more aligned to the British consumer. Just 7% of consumers said they wanted their electricity supplied by fossil fuels, compared with 70% who wanted their electricity to be supplied from renewable sources. More than 57% of UK consumers wanted to see a reduction in fossil fuel use in future, compared with 80% that wanted to see an increase in the use of renewables.
But it seems that the Chancellor has thus far ignored this preference for renewbles over fossil fuel generation.
In February, a group of more than 100 MPs sent a letter to David Cameron arguing for a cut in government support for onshore wind power. Osborne threw a spanner in Cameron’s “greenest government” with demands for a 25% cut in subsidies for the wind sector.
To learn more about the role of wind power in the UK energy sector, read more on Breaking Energy here.
A compromise was reached with 10% reduction Renewable Obligation Certificates for onshore wind, an agreement to create more opportunities for communities to benefit from wind farms and an acknowledgement from the Lib-Dems that natural gas would have to play a role in the UK’s energy mix through 2030.
Davey’s bill will be introduced in the next session of parliament and is touted as the biggest shake up in the energy sector since the UK liberalized its electric utility industry in the 1990s.
At the heart of the bill are Electricity Market Reform (EMR) measures such as Feed-in-Tariffs with Contracts for Difference (CfDs), long-term agreements that give a guaranteed price for low-carbon electricity to reduce the financial risk for investment in capital-intensive projects such as nuclear and offshore wind.
But the bill is not without its controversy. Investors expected that CfDs would be guaranteed by the government, therefore lowering the cost of borrowing to finance the projects.
But the Treasury intervened to ensure that the contracts are not guaranteed by the government, but spread liability across energy companies.
The changes provoked a furious response from Tim Yeo MP, chair of the Energy and Climate Change Committee and a member of Osborne’s own party.
“The Government is in danger of botching its plans to boost clean energy, because the Treasury is refusing to back new contracts to deliver investment in nuclear, wind, wave and carbon capture and storage,” he said.
Osborne’s Treasury also said it will impose a spending cap that limits costs that can be passed through to consumers via their electricity bills. But MPs have criticized the cap because it will ration the number of contracts available and increase energy costs for consumers.
“Electricity market reform is essential, but the new contracts proposed by the government will not work for the benefit of consumers in their present form,” said Yeo.
Magnus Dale, Europe wind analyst at IHS Emerging Energy Research, said that the impact on developers could be significant.
“Despite the onshore market still offering considerable opportunities for large-scale build out in the resource-rich region in the north or for continued community build-out in the south, local opposition and drop in support to 0.9 Renewable Obligation Certificates is likely to impact developer pipelines and hamper further growth.
“There is some uncertainty regarding the future market framework for players in wind and other renewables as the proposed energy bill failed to detail key implementation measures,” said Dale.
Problems With the Dash to Gas
As British MPs work out the details of the energy bills, Osborne is not only at risk of ignoring the public or even members of his own Cabinet. History shows that the switch to gas has been fraught with problems in the UK, which has been a net importer of gas since 2004. Imports in 2010 accounted for just under a half of the UK’s gas demand, a trend that is growing as the country becomes more reliant on gas pipelines from Norway and the Netherlands, and LNG from Qatar.
The UK inherited a legacy of high electricity prices from the “dash to gas” when energy companies were privatized in the 1990s. Gas generation facilities were quick and relatively cheap to build and gave rapid return on investments at a time when supplies were steady from the North Sea. But UK natural gas reserves have been steadily declining since 1999.
Critics of the UK’s renewables policy were disappointed earlier this year when the government’s own policy watchdog found that imports of this volatile commodity, not environmental targets, increased electric utility bills.
The Committee on Climate Change found that from 2004 to 2010, government support for renewables added £30 to the average energy bill while rises in the wholesale cost of gas added £290.
Will Straw, associate director of the Institute for Public Policy Research, said: “Too often, criticisms of wind power technology have been made that are not based on robust evidence. The interests of UK consumers and the British economy are best served if debates on wind power stick to the facts.
“The potential for wind power to save carbon emissions and the reliability of the technology, at least in the period up until 2020, are essentially settled issues.”
Osborne should reveal more of his strategy this autumn, but he may still be short on data to support a sequel to the “dash for gas”, a legacy that could saddle the British consumer and the economy with volatile energy prices for generations to come.
This piece appears on Breaking Energy as part of the Energy Transparency series in partnership with Vestas.