Budget: Time to turn talk into action

By Dr Jonathan Marshall, ECIU Energy Analyst

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All eyes on Phillip Hammond ahead of Wednesday's budget. Image: Lithuanian MFA

As the second budget of the ‘fiscal Phil’ era rolls nearer, we don’t have to look very far at all for a dose of good old red-vs-blue squabbling. However, on energy and climate matters, the mood music is unusually positive. Since a noted change in tune within Conservative ranks on the back of the publication of the (Theresa May-fronted) Clean Growth Strategy, an optimist could even say we are looking at an arms race in climate-rhetoric.

Opinion pieces from members of both the Government and opposition front bench have seen the two main parties vying to look as green as possible. A notable shift from Messrs. Cameron and Osborne’s willingness to ‘cut the green crap’ at the first sight of a tightening balance sheet.

Following a few weeks of encouraging ‘big picture’ announcements – 2035 pathways, international agreements to move beyond coal, and so on – the budget is the first chance for the Government to put its money where its mouth is and announce properly-funded, properly-thought out policies that will not fall to a Brexit-shaped axe in early 2019.

Claire Perry

Climate minister Claire Perry has impressed many in her tenure to date. Image: Policy Exchange

Devil in the detail

Which brings us to the two main matters at hand; the carbon floor price (CFP) and the levy control framework (LCF), and a sizeable portion of déjà vu. We have definitely been here before, but now the can cannot be kicked any further down the road. There is no way that the Government can again delay the future of these policies. Any uncertainty over the carbon price would throw February’s capacity market auction into disarray, as parties making bids for payments four years from now need to know what the floor will be before tabling their bids.

Any more hesitance on the LCF risks strangling a growing UK-based renewables sector, at a time when all-too-frequent announcements of jobs moving overseas make uncomfortable reading on Downing Street.

The CFP is by far the easiest of the two nuts to crack. It is one of the main reasons behind the UK’s startling progress on cutting power-sector emissions, sending us shooting up the clean electricity league table and topping the G7 nations in terms of economy-wide decarbonisation over the past 25 years. There are a few calls from the back row to scrap the floor price, but nearly everyone else in the room is calling for it to stay at the same level.

Of course, when first implemented the floor was supposed to be much higher than it is by now, but it would be spurious to claim it isn’t effective at the current level. Expect it to be pushed out to 2025 at £18 per tonne, taking us to the date when coal power stations will either be forced offline through legislation, have broken down beyond economical repair or surpassed by cleaner forms of generation.

Watering down the floor before then runs the risk of a coal comeback, which would be fairly embarrassing for a Government touting its post-coal leadership on the global stage.

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The cost of UK offshore wind has plummeted. Source: KPMG

How to design and implement a replacement for the LCF – which Mr Hammond promised back in March – is a trickier task. Tasked with both controlling spending on low-carbon power and providing necessary certainty to maintain a pipeline of projects, the LCF has been facing criticism since the get-go.

Any replacement for the LCF would be expected to be rigorous enough to avoid the pitfalls of its predecessor, which ran chronically over budget on account of higher-than-anticipated uptake of renewables, which performed better than expected when up and running.

On a basic level, it will be looked to for certainty for the renewables sector into the late 2020s, and should address the issue of supporting high cost first-of-a-kind projects such as Hinkley Point, and maybe a tidal barrage or two, which the CfD wasn’t really designed to accommodate. Could we see these hived off into a different ‘pot’, analogous to the ‘legacy costs’ scheme proposed by Dieter Helm? If costs are to be segregated in this way, does this merit the continuation of the LCF at all?

The dramatic falls in the cost of wind and solar power have not escaped the Government, who profess to be looking towards the cheapest (and easiest) means of cutting power sector emissions. It may be too soon for a main stage announcement on an onshore wind comeback, although a softening on position has been alluded to by the ministers in charge, but the goal is wide open to fill the green deal-shaped void in energy efficiency policy.

Ambition

However, is this enough? Replacing the LCF is an opportunity for truly forwards-looking policy. If this Government is serious about keeping ahead of the curve, it should be kicking open as many doors as possible rather than just looking through those it has had the key to for a while. This could mean; the comeback of onshore wind in Scotland, allowing English and Welsh onshore wind to be repowered through CfDs, a decision on tidal power (despite rumours that Swansea Bay is set to get the thumbs-down), an announcement on industrial CCS that is more than a token gesture, and surely a pivot away from fracking.

It could also take the form of; a return of zero-carbon homes, action on aviation, support for heavy industry to both improve efficiency and reduce emissions, and comprehensive backing for the switch from petrol and diesel to electric vehicles.

These are the sort of policies that would be on the to-do lists of rival parties and nations, and therefore would be expected atop those of any Government looking to cement itself as the ‘greenest ever’. The 2017 Conservatives have made a fine start on green rhetoric, but now is the time for them to show how it can be done.