Why the Energy Bill decarbonisation target matters

With reports suggesting the debate on a decarbonisation target could be kicked into the long grass, it is worth remembering the importance of this target goes way beyond Westminster politics

19 Nov 2012, 13:43

At least one thing about the Energy Bill now appears certain. It will be published "within a few days", according to business secretary Vince Cable, meaning the government will presumably be able to make good on its pledge to pass the bill before the end of the year.

However, the precise details of this crucial piece of legislation remain as opaque as ever, with reports over the weekend suggesting the critical issue of whether or not the bill contains a decarbonisation target for the electricity sector could be postponed until after the next election.

The latest news is that the quad of senior ministers did not even discuss the Energy Bill last week, such is the scale of the disagreement between the Treasury and the Department of Energy and Climate (DECC) on a number of key aspects in the bill. Meanwhile, it is noticeable that energy hardly got a look in during this morning's platitude-laden speeches to the CBI from both Cable and the prime minister. In fact, the only mention the Energy Bill got was through the Twitterati's suggestion that it was a bit rich for David Cameron to blame civil servants for slow progress on policy implementation, when it is his inability to take tough decisions on energy and infrastructure that is at the root of current uncertainty on everything from wind farms to airports.

All of which suggests that if the Energy Bill has been given a hard and fast launch date of this week, it remains entirely possible it will be published with a handful of issues, including the question of whether or not to include a decarbonisation target, unresolved.

If this is indeed the case, the focus will inevitably be drawn to the political repercussions of such an embarrassing and visible defeat for the Liberal Democrats. The Lib Dem leadership chose to make the decarbonisation target a totemic issue, having Danny Alexander table a motion at conference calling for the inclusion of a target which was overwhelmingly approved by the party, and making it clear the Lib Dem-controlled DECC wanted a flexible target in its bill.

And yet the repeated delays to the bill suggest the Lib Dems have yet again underestimated the willingness of the Osborne-run Treasury to indefinitely impose crippling policy uncertainty on a growth area of the economy in order to win political points. Regardless of whether or not the rest of the bill is broadly positive, any failure to include a decarbonisation target within primary legislation will be seen as a crushing blow to the Lib Dems and will again spark serious questions about the junior partner's role in the coalition.

However, the political fallout is ultimately far less significant than the impact the absence of a decarbonisation target would have on the UK's energy industry and the wider economy's attempts to decarbonise.

It is important to remember that there is a reason why DECC, the independent Committee on Climate Change, the Energy and Climate Change Committee of MPs, the nuclear industry, the renewables industry, the CCS industry, a raft of the UK's largest businesses, and all the green NGOs want a decarbonisation target – and it is not because they want to embarrass George Osborne.

Once the Energy Bill is passedm, energy investors and developers will have to make a series of decisions on where to invest as they attempt to upgrade the UK's ageing energy infrastructure. These decisions will be informed by the returns on offer through the bill's new contracts for difference (CfDs), but unless these returns are extremely generous large numbers of investors will opt for the technology, which, if you ignore concerns over international fuel and carbon price volatility, offers the lowest upfront capital requirements, namely gas.

Without a decarbonisation target new gas plants would quickly establish themselves as the default new build option for the UK. This may be staggeringly short-sighted and irresponsible, given the likelihood of rising carbon prices and the ever-mounting climatic warnings about the urgent need to build a low carbon economy. It may also change over time as the cost of renewables continues to fall, the cost of gas (probably) continues to climb, and the level of returns available to low carbon energy projects through the CfDs prove to be attractive and stable. But, in the short term, we would inevitably see a fast and significant "dash for gas", just as the chancellor said he wanted to deliver in his controversial leaked letter to energy and climate change secretary Ed Davey this summer. The scale of this "dash for gas" would almost certainly exceed the necessary and welcome gas investment required to provide long-term back-up for renewables and nuclear, and while it would deliver emission reductions when replacing coal-fired power plants, it would not deliver the scale of long-term emission cuts required for the UK to stay within its carbon budgets.

That is why the Committee on Climate Change and so many others have been calling for a decarbonisation target – without it there is nothing to stop the UK getting locked into another round of relatively high carbon infrastructure that makes sufficiently deep emissions reductions all but impossible without remarkably rapid breakthroughs in CCS technology.

Apologists for the Treasury's stance have already started to suggest we do not need a decarbonisation target as we already have the Climate Change Act imposing binding economy-wide carbon budgets. But this argument is misguided on a number of fronts. Firstly, a decarbonisation target would give ministers the power to effectively stop gas-fired power plants operating if they are exceeding carbon targets in the way that the Climate Change Act does not. Secondly, would carbon budgets really discourage excessive investment in gas when we know from Greenpeace's undercover investigation into anti-wind farm MPs last week that the chancellor is believed to be actively attempting to water down these budgets? The likelihood would be that gas investments would go ahead regardless, albeit with the irony of these projects facing higher costs of capital relating to the political uncertainty caused by the ongoing row over the Climate Change Act.

In contrast, a flexible decarbonisation target would give the government the control it needs to approve the new gas plants required for back-up power through to 2030 and beyond, while also allowing it to avoid the excessive dash-for-gas that would not only make binding emission reduction targets very difficult to meet, but would also starve renewables and other low carbon energy projects of much needed investment.

Lib Dem ministers will again face howls of outrage from their supporters if they fail to deliver a decarbonisation target, but the political repercussions of the on-going stand-off are as nothing to the real world repercussions for clean energy projects up and down the UK.

With just days to go until the Energy Bill is released, it is vital the Lib Dems and those many businesses that understand the need for a decarbonisation target again call on the Treasury to realise that far from damaging growth prospects, a clear commitment to a decarbonised energy system can drive the investment and growth the UK desperately craves. Or failing that, they need to force Osborne to clearly explain how his pro-gas vision is compatible with the government's stated low carbon ambitions. At least then we would have some form of certainty.

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Previously known as the BusinessGreen Blog, James' Blog features musings, observations and occasional rants from BusinessGreen editor James Murray

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