Budget 2017: Dealt a dud hand?
By Dr Jonathan Marshall, ECIU Energy Analyst (@JMarshall_ECIU)
Well that was it, Budget 2017 is done. Philip Hammond has been praised by commentators for taking a bad hand and playing it well. Despite green rhetoric flowing from BEIS since the summer, the Chancellor appears to have played it forwards, dealing ministers pushing for a low-carbon future the equivalent of a 7-2 split.
The decision to replace the Levy Control Framework with the more ominously-named ‘Control’ which prohibits more low-carbon levies until 2025, shocked many, but how much of a delay is this? With the next CfD (contracts for difference) auction currently pencilled in for early 2019, it is likely that winning projects would not come online until 2025 anyway. And, if the offshore wind sector delivers another knockout result on par with the September auction, it is possible that the Treasury could be convinced into supporting one of the UK’s fastest growing sectors with fixed-price deals that begin in the latter half of the next decade.
That is if the next auction doesn’t drop until 18 months away. The Treasury document doesn’t contain suggestions of a schedule, which could leave the door open for BEIS to lay down their own timeline. Shifting the £557m left on the table from the Osborne-era into three or more, well-spaced auctions could give the wind sector some much-needed certainty, in the medium term at least. A level playing field between Round one, two and three sites would keep these costs down, allowing the offshore industry to deliver well above the expectations laid out yesterday.
Another seemingly killer blow was contained in forecasts for capacity in years to come, with solar, onshore wind and tidal among many shunned in the name of the offshore wind rush. While tidal power seems too expensive for the moment – although developers are said to be still eyeing some of the £557m pot – there is no reason that Mr Hammond cannot be proven wrong in solar and onshore wind.
The past couple of months alone have seen two commercial scale solar farms announce that they will operate on a merchant model alone (effectively subsidy-free), with no guaranteed price set in advance. Although consecutive Conservative manifestos have repeatedly said that more onshore wind is not right for England and Scotland, there are at least eight early onshore wind projects that are scheduled to retire before 2020.
While most of these are small, repowering at a cost lower than wholesale price forecasts is a very real possibility and could add further weight to the shifting opinion on onshore wind reported recently. With the latest German onshore auction closing at £33/MWh, more than a tenner below wholesale price forecasts published by Treasury yesterday, this seems like a very real possibility.
However, some dangers remain. Should February’s capacity market auction incentivise new large gas power stations, these high-carbon units could be locked into the system for more than two decades, possibly replacing some of the nuclear capacity which will retire in the 2020s. This would lead to an uptick in power sector emissions which, coupled with the tardy progress on transport, heating, aviation and North Sea oil outlined in the Budget, could leave less scope for the ‘banking and borrowing’ system that the Clean Growth Strategy states will be used to meet the fourth and fifth carbon budgets.
So, not all doom and gloom. But a lot lies on how BEIS plays the hand it has been dealt.