Industry News

Energy Bill: The good, the bad, and the ugly
The Green Deal Mag /23 November 2012

The Energy Bill is a sizeable step in the right direction, but it could have been so much more if the coalition was united on the green economy. First, the good news. Next week the government will unveil its Energy Bill and, after a crippling two-year wait, UK businesses and investors will finally have some medium-term certainty about the country’s energy policy landscape.

The deal brokered between energy and climate change secretary Ed Davey and chancellor George Osborne will deliver a Bill that contains plenty for business leaders to celebrate. The new contracts for difference (CfDs) should provide stable financial returns for low carbon energy projects, backed by a single counter-party and, critically, a substantial levy control framework that all but guarantees the UK will both meet its 2020 renewable energy targets and move forward with a new fleet of nuclear reactors.

It is a sad indictment of current relations within the coalition that simply ensuring the government complies with legally binding targets and honours the coalition agreement represents a significant victory for the Lib Dems. But confirmation that  the CfDs will be backed by at least £7.6bn a year by 2020 represents a sizeable win for Davey – anyone doubting this should just look at the Tory blogs and the front page of The Telegraph this morning, which condemn the chancellor for caving in to green demands and putting up energy bills.

Investors will have to wait to see the detail of the Bill and the all-important “strike price” that will be offered through the CfDs before moving forward with low carbon energy projects. But the combination of the new subsidy mechanism, the stable levy control framework, and the planned capacity mechanisms mean we are likely to see a surge in energy infrastructure investment. It is easy to understand why the CBI, Energy UK, and RenewableUK were united this morning in their effusive praise of the Bill. RenewableUK’s Maria McCaffery might have gone a bit over the top with her declaration that today’s deal “blows the last few months of political infighting completely out of the water”, but her members will be delighted they can finally start planning projects for the second half of the decade.

The green economy will continue to grow rapidly and emissions will continue to fall, driven by huge investment in innovative low carbon energy technologies and the realisation that the resulting short-term increase in energy prices makes a greater focus on corporate and domestic energy efficiency an absolute necessity. The next eight years should now be characterised by a historically significant £100bn plus round of investment in state-of-the-art renewable energy projects, nuclear plants, carbon capture and storage (CCS) demonstration sites, smart grid upgrades, and, of course, gas infrastructure.


Which inevitably leads us to the bad news. The Lib Dems are spinning furiously this morning to position the deal as a victory, which it is; but conversely it is also a crushing defeat. Davey and co set up a political battle by making it clear they wanted a flexible decarbonisation target for the power sector in the Energy Bill. They lost.

Importantly, Davey did wring some concessions from Osborne in the form of new guidance to National Grid on an “indicative range of decarbonisation scenarios for the power sector in 2030″ and a commitment to revisit the issue of a decarbonisation target in 2016. But the independent Committee on Climate Change (CCC) did not recommend the inclusion of a decarbonisation target for kicks. As the CCC’s chair, Tory peer Lord Deben, pointed out this morning, the absence of a target “leaves a high degree of uncertainty for investors and does not address widespread investor concerns raised in recent months; it could adversely impact on supply chain investment and development of projects to come online after 2020″.

Without the target, an Energy Bill that could have proven genuinely transformative and put the UK firmly on the path to a low carbon future instead simply enables business-as-usual in the form of a new “dash for gas”, albeit with welcome new investment in lower emission energy sources bolted on the side.

Despite months of fractious negotiations, Lib Dems and green-minded Tories have singularly failed to convince the chancellor and the prime minister of the critical importance of the decarbonisation target. Remarkably, they also failed to flush Cameron and Osborne out into the open to explain precisely why they do not want to fully decarbonise the power sector and why they think a reliance on imported gas is good for the UK’s energy security.

It is worth asking if Lib Dem MPs will now loyally file through the lobby in support of a Bill that not only increases support for the nuclear power that they once opposed, but also enables a “dash for gas” that many party members are virulently opposed to. They could legitimately argue that with the CCC recommending a decarbonisation target and numerous businesses in favour of its inclusion in the Bill, the legislation in its current form is not in the best interests of the country or the planet. They won’t, but they could.


Unfortunately, however, the bad bit of the Bill is not the really bad bit. The really bad bit is the ugly bit, and that is really ugly. The fudged compromise that has kicked the decision on the decarbonisation target into the long grass of 2016 means the much-trumpeted policy certainty delivered by the Energy Bill is much less certain than it could have been.

Imagine you are a prospective gas developer. You’ll be able to move forward with new projects safe in the knowledge that gas remains the default option for the energy industry, but you also know that, as of 2016, legal confirmation could come through that means you would have to drastically scale back the use of your facility in 14 years’ time, well before the end of its lifespan. You know a Labour victory at the next election or the formation of a Lab-Lib coalition would almost certainly see a decarbonisation target adopted, just as you suspect a Conservative victory could result in a formal decarbonisation target being ditched.

The net result is that political risk will continue to drive up the cost of capital for all forms of energy, including gas. Ironically, it is possible that the uncertainty Osborne created by opposing a decarbonisation target means the cost of capital for gas infrastructure will end up being higher than it would have been if a clear target had been agreed, allowing gas plants to plan for a world where they are used as a source of back-up power post 2030.

The situation for low carbon energy developers is actually slightly better, as the CfDs promise to give them the kind of stable and predictable returns that should help attract investors. But anyone planning to invest in the renewable the energy, nuclear or CCS supply chain still faces major uncertainty as they have no idea whether demand for these technologies will accelerate post 2020 as the power sector continues to decarbonise, or whether they will still have to compete with cheap to build (but expensive to run) unabated gas plants. The Climate Change Act should provide certainty that the market will continue to develop, but we know from the last few months that a number of influential Conservatives are desperate to water down this flagship legislation.

It will be highly informative to see if those companies considering locating new offshore wind manufacturing plants in the UK now take the leap and invest or opt to delay their decision until the post-2020 outlook becomes clearer. Siemens has already poured some luke-warm water on the announcement this morning, insisting it needs to see more detail before making a decision.

The Energy Bill is undoubtedly a sizeable improvement on the status quo and it will allow investment to flow over the next few years; hence, the broadly positive response from investors and business groups. But it could have been more positive still if the coalition was not so riven with in-fighting over this critical part of our economy.

The really ugly aspect of the Bill is the way in which it has confirmed once and for all that the political consensus on the green economy and climate change has shattered.

Davey got the best possible deal available given he was negotiating with people who no longer respect the urgent need to decarbonise the UK economy, who are working with their own “facts” regarding the prospects for the global gas industry, and who are openly hostile to the Climate Change Act. Osborne has now tried twice to reject the advice of the CCC – once unsuccessfully over the fourth carbon budget, and now successfully over the decarbonisation target. On neither occasion has he respected the spirit of the Climate Change Act and explained why he is at odds with the government’s independent advisors.

The UK’s green economy will continue to prosper, because it is popular with the public, driven by increasingly impressive and cost-effective technologies, and underpinned by legal requirements and broadly effective policies. But the farcical handling of the Energy Bill proves that green businesses will have to adapt to a new reality in which an influential part of the UK’s political community is openly hostile to the idea of green growth for purely ideological reasons.

The next election will now not only determine whether or not the Energy Bill actually delivers on its long-term goals and provides a decarbonisation target, it will also determine the UK’s competitiveness in the world’s fast-expanding green economy.

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Green deal: households to get up to £1,000 for insulation
Adam Vaughan, The Guardian, Friday 19 October 2012

Cashback announcement aims to kickstart scheme to pay homeowners to undertake energy efficiency improvements Householders insulating their homes from January will be able to claim hundreds – and potentially thousands – of pounds back in cash from the government, the energy secretary, Ed Davey, said on Friday.

Following a week of controversy over rising energy bills and confusion over an announcement by David Cameron that energy companies would have to offer customers the "lowest tariff", the Department of Energy and Climate Change (Decc) outlined a £125m pot of cashback money for the first people to increase the energy efficiency of their homes under the green deal.

Under the scheme, the coalition's flagship environmental policy, householders take out a loan with a provider who undertakes work such as upgrading old boilers, lagging lofts and draught proofing. The loan repayments must be offset by the energy savings, under the scheme's so-called "golden rule", though there is no government guarantee underpinning it.

Davey said: "The green deal will provide unprecedented choice for consumers wanting to improve their homes and make them more energy efficient. This cash back offer will help get the green deal off to a flying start. It really is a great offer – the more work households have done, the more energy they stand to save and the more cash they receive." The rates initially offered will only be available to the first thousands of households to give their homes an energy makeover, and will be reviewed once £40m is spent, which could be as quickly as "two or three months if it goes well," according to a Decc spokesman.

Rates include £650 cashback for fitting solid wall insulation, £150 for floor insulation and £50 for draught-proofing, and if enough works are undertaken, the cashback could add up to more than £1,000. However, the Decc spokesman said it was expected the average household would get around £350, meaning the rates could be cut after 114,285 households have undergone works.

The cashback will be capped at 50% of a householder's contribution, with the money paid by the company that undertakes the retrofitting. The loan is tied to the property, rather than the individual. The government hopes the green deal will transform the energy efficiency of 14m homes, 43% of which still have inadequate loft insulation, while creating thousands of jobs and cutting carbon emissions.

"The cashback will help get the green deal away. But the long-term success of the scheme will still depend on the interest rate [of the loans]," David Symons, director at WSP Environment & Energy, told the Guardian. Some analyses have suggested that householders will spurn the green deal because interest rates could be set too high. The typical rate is expected to be between 6-8%.

Shadow climate change minister Luciana Berger, said: "This is another hurried announcement from an out-of-touch government, making it up as they go along, desperate to divert attention from an energy policy which is in chaos. "No amount of gimmicks and giveaways can distract from the fact that unless the green deal is a good deal and saves the public money, it will not be a success. Because of the high interest rates that consumers will have to pay on green deal finance, even with the energy secretary's announcement of a £1,000 discount, in many cases people will still have to pay more in interest payments than the upfront cost of the measures they take out under the green deal."

Audrey Gallacher, director of energy at Consumer Focus, said: "It's very welcome to see the government providing cash incentives to those who take up the green deal scheme early. It's also welcome that people don't have to take out green deal finance to qualify. But the government needs to provide incentives to all customers, not just early-adopters, to ensure wide-spread take-up in the long-term. This could mean moves such as council tax breaks or similar benefits for taking up energy efficiency measures."

Companies confirmed as planning green deal products include British Gas, E.ON and Scottish and Southern Electric, but major retailers such as Tesco and M&S that were talked up as possible providers have yet to confirm they will be taking part.

The £125m cashback pot comes from a £200m Treasury fund announced last November, with the remaining £75m being spent largely on promotion via local authorities. A Decc spokesman said that, separately, the department is likely to use its own budget to spend on advertising, potentially online, but "not on a big TV campaign."

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Implementation Timetable

December 14th, 2007
All homes put on the market must have a Home Information Pack (HIP). It includes the sale statement, local searches and evidence of title and an Energy Performance Certificate (EPC).

April 6th, 2008
All new homes put on the market will require a HIP including an EPC. Homes marketed before their completion will require a Predicted Energy Assessment (PEA) with an EPC replacing the PEA in the HIP once the build is completed.

October 1st, 2008
All properties let or rented will require an EPC on the next change of tenancy.

Commercial Implementation Timetable

April 6th, 2008
Energy Performance Certificates required for the construction, sale or rent of buildings other than dwellings with a floor area of over 10,000m2

July 1st, 2008
EPC’s required for the construction, sale or rent of buildings other than dwellings with a floor area of over 2,500m2

October 1st, 2008
EPC’s required for the construction, sale or rent of all remaining buildings (dwellings and non-dwellings) January 4th, 2009 First inspection of all remaining air-conditioning systems over 250kW must have taken place by this date.

January 4th, 2011
First inspection of all remaining air-conditioning systems over 250kW must have taken place by this date.

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