Renewables

Today’s headlines continue to document the fallout from the election. The first draft of this blog started with the words “Now we know.” Perhaps, in light of recent events, we now need to add the words “sort of” to that introduction. The last thing the energy industry wanted from the election was yet more uncertainty, and yet that is what we appear to have.

It now looks settled that the Conservatives will form a minority government, with some form of flexible support from the DUP (potentially on an issue by issue basis). So what is the election result likely to mean for UK energy policy. The Conservative plan will form the basis, but what influence could DUP have?

Government and Parliament

The UK Government may not have a majority in parliament, but it has a wide range of executive powers.

Many of the policy levers in energy lie in the hands of the Secretary of State for Business, Energy and Industrial Strategy, Greg Clark, and many more policies can be implemented by secondary legislation.

As a minority government rather than a coalition, BEIS will remain under Conservative control.

It is clear in reviewing the Conservative manifesto that it will not require primary legislation to implement the party’s energy policies.

Some may need secondary legislation – for example the changes to the Renewable Heat Incentive (RHI), which may now be delayed by a few more weeks.

Nonetheless the Government should be able to implement its policy programme.

DUP

The DUP is not a party that favours climate action – it is not mentioned in its manifesto. The support of the DUP may therefore have little impact on UK energy policy.

Independent review into the “Cost of Energy”

A key focus of the energy policy in the Conservative Manifesto is affordability.

The DUP Manifesto also singles out affordability of energy as a key issue – in particular wanting to see energy companies place downward pressure on bills – so the parties are aligned on this issue.

The Conservative manifesto says that the UK Government will commission an independent report into the “Cost of Energy”.

The terms of reference are worth reflecting upon.

They appear broader than the terms described in the Industrial Strategy Green Paper, which appeared to envisage a more targeted review. The approach in the manifesto is framed in terms of the energy trilemma – cost, security of supply and decarbonisation.

Yet, rather than simply say that the three elements are to be balanced, it gives primacy to cost – the objective is that UK energy costs are “as low as possible”. This provides some welcome clarity on how the Conservatives will seek to balance the three elements of the trilemma – though it is worth noting that the DUP places greater emphasis on security of supply, going so far as to call for a new Energy Strategy to deal with security of supply.

If the terms of reference of the report are as broad as advertised in the Conservative manifesto, it seems inevitable that two conclusions will be reached.

First, that onshore wind supplies the lowest cost energy.

Second, that nuclear supplies the highest cost energy (excluding carbon taxes and carbon capture and storage (CCS) schemes).

While the UK Government’s own report in November 2016 on the levelised costs of energy forecast that offshore wind would be more expensive in 2025 than nuclear, albeit marginally, with the second CfD auction in the offing, few would subscribe to that prediction now.

This would present a dilemma for the UK Government since there would be no escaping the conflict between the policy to keep costs “as low as possible” and the policies to favour nuclear and disfavour onshore wind. This could herald a quiet revolution in policy.

“Seizing the industrial opportunity that new technology presents”

Another revolution in policy is the opening of the door to the shale industry (fracking). The Conservative manifesto pledges to seize opportunities presented by new technology and the discovery of shale energy is hailed as a “revolution” which can “help reduce carbon emissions” and “could play a crucial role in rebalancing our economy”.

The other mainstream political parties (and the DUP) do not share this view – Labour, the Liberal Democrats and the Greens all oppose fracking and the SNP has instituted a moratorium in Scotland – so expect continued opposition to this policy.

Opportunities are also seen in the transport sector, where the Conservatives would like “almost every” car and van to be zero-emission by 2050 and plan to invest £600 million to help achieve this.

There are no details on how this £600 million will be spent.

This would be consistent with the Conservatives’ ambition for “Britain to lead the world in electric vehicle technology”, but let’s not forget alternatives such as biomethane vehicles and hydrogen vehicles – there’s no mention of either in the manifesto. The DUP has not gone into much detail in its manifesto, particularly on energy technology.

 “Based not on the way energy is generated but on the ends we desire”

The future energy mix is to be driven by ends (keeping the lights on) and not means. Some might ask the question whether the Government’s onshore wind policy is driven only by the ends.

The Conservative manifesto says this about onshore wind: “We don’t believe that more large-scale onshore wind power is right for England.” While this may appear unambiguous, there is more to this statement than first appears. It is true that it rules out large onshore wind projects in England, subsidised or unsubsidised, but:

  • it does not rule out onshore wind in Scotland, Northern Ireland and Wales;
  • it does not rule out small or community wind schemes in England;
  • it does not rule out subsidy (for any technology) and explicitly says it will “support” onshore wind in remote islands; and
  • it would not be a breach of the manifesto if onshore wind is included in a Pot 1 CfD auction (so long as no large-scale windfarms in England win a CfD).

With affordability in mind, it is possible to chart a course, which does not breach any manifesto commitment, to a re-balancing of policy where the lowest cost forms of energy (onshore wind and solar) are welcomed back into the fold while nuclear is, well, priced out of the market.

The Conservative manifesto leaves most doors open – solar, hydro, tidal, heat and carbon capture & storage technologies are not mentioned at all.

This provides the UK Government free range on future generation policy and the operation of the CfD.

The DUP manifesto does not mention energy mix (possibly to avoid any reference to the Northern Ireland RHI scandal) or climate change and we would expect Conservative policy to lead the way – the DUP will chose its battles, and energy policy is not likely to be at the top of its list.

“After we have left the European Union”

The path forward on energy policy will depend on the terms of reference of the independent report into the cost of energy (will this be as wide as suggested by the Conservative manifesto?) and the terms of Brexit.

The Conservative manifesto refers to policy development “after [the UK] has left the European Union” hinting at opportunities for change after we leave the EU.

Of course, recent events have clouded rather than clarified the likely terms of Brexit but the uncertainty means industry may decide it wise to prepare for a harder version of Brexit, and in that version of Brexit, there will be more opportunity to change energy policy than in a softer version of Brexit.

If the renewables industry wants to achieve a re-balancing of policy it should use the remaining period until Brexit wisely to lobby the UK Government for broad terms of reference in the Cost of Energy report and for beneficial changes to policy which could be made after we leave the EU.

Blog written by Laura Sefton and Keith Patterson

Keith Patterson

Keith Patterson

Partner at Brodies LLP
Keith is Head of the Projects Group at Brodies with a background in infrastructure procurement and funding. He has advised developers, investors, lenders, public sector bodies and community groups on projects, and has completed more than 20 renewables financings.
Keith Patterson