Solar industry once again falls victim to its own success

13 May 2014

school-roof-solar

It will offer scant consolation to those solar developers facing the third major subsidy review in as many years, but any industry executive looking for a silver lining might reflect on the fact the latest proposed changes are a direct result of the sector's staggering success.

The drastic reduction in the cost of solar technologies - by some industry estimates solar farm costs have fallen over 30 per cent in two years - coupled with the breakneck speed with which solar panels can be installed presents a unique challenge to policymakers. A challenge Whitehall is still yet to get to grips with.

Following two previous reviews of solar subsidies necessitated by the manner in which new solar projects were being delivered so fast that Ministers' feared their clean energy subsidy budget, known as the Levy Control Framework (LCF), was being burnt through, the Department of Energy and Climate Change (DECC) has again found itself in precisely the same position - proposing cuts to solar subsidies at surprisingly short notice in a desperate attempt to take some heat out of the market.

Solar developers who are angry at experiencing their very own renewable energy version of Groundhog Day may like to reflect that DECC does appear to be getting better at this exercise the more practice it gets. Today's consultation proposes changes that won't come into effect for 11 months and promises "grace periods" for projects already in the pipeline. Moreover, this time around Minister's don't appear to proposing illegal policy changes that breach their own consultation rules. I think we can call that progress of a sort.

It is also worth noting there are legitimate reasons for wanting to keep solar subsidies under particularly tight control. The hugely admirable speed and relative ease with which you can build a solar farm or install a rooftop solar panel means that, unlike a large offshore wind farm or nuclear power plant, deployment rates can quickly accelerate in a way that would result in clean energy budgets being broken. Ministers have a responsibility to retain a high degree of budget control, not least because the LCF is not a bottomless pit of money, it is paid for through the energy bills of households and businesses and as such excessive deployment of subsidised projects could and would lead to higher bills for the public.

Moreover, the rapid reduction in the cost of solar energy means frequent cuts to subsidies are needed to ensure that new projects are not being over subsidised and delivering excessive returns to developers. By repeatedly trimming the level of support ministers can ensure more projects get support from the finite LCF budget, leading to higher levels of renewable energy and lower carbon emissions at the same cost. That is precisely why the government introduced a "degression" mechanism to ensure subsidies fell over time, but as the latest consultation suggests solar deployments can happen so quickly that these automated cuts to subsidies can still be overwhelmed.

You can argue we should be willing to pay more for clean energy, and it is definitely worth noting that according to the government's own figures the entire electricity market reform delivery plan is estimated to impose low carbon generation costs of around £76 per household in 2020, or under £1.50 a week. Similarly, the whole Renewables Obligation (RO) scheme costs households £30 a year and solar PV costs from the RO are estimated to have reached a whopping £1 a year. Costs are expected to rise, but it is from a very low base.

That said, if the last few months in Westminster has taught us nothing it is that energy bills are a politically toxic subject and any technology that can be shown to applying more inflationary pressure to bills than expected would inevitably find itself vulnerable to even steeper subsidy cuts in the future.

However, the solar industry is still largely justified in its angry response to the government's latest proposal to end access to the RO support scheme for solar farms from next April and force new solar farms to compete for support with other renewables technologies, including onshore wind farms. And it is angry. The Solar Trade Association's (STA) Paul Barwell today described the proposed changes as "alarming" measures that had seen solar "singled out for harsh treatment". Seb Berry of Solarcentury slammed the proposed reforms as "unnecessary and totally at odds with the government's desire to reduce the cost to energy bill payers of delivering the 2020 renewable energy target". Others were angrier still, privately warning that the government was on track to kill off the UK's solar farm industry.

They may well have a point. If you look at the detail of what the government is proposing today and how it fits into the UK's wider long term energy strategy it is clear that solar developers are facing a staggeringly messy and unstable policy landscape that will deal a major blow to long term investor confidence.

It seems pretty clear there will now be a continuation of the current surge in solar farm development through to April 2015. And then? Who knows.

The government's stated goal is for a slowdown in solar farm development to be replaced by an acceleration in the development of large scale solar rooftops on supermarkets, offices, warehouses, and public building. But proposed changes to feed-in tariff bands for rooftop installations that were also announced today simply promise a slower rate of future reductions to support levels, not the increase in support developers argue is needed to jolt the commercial rooftop sector out of the doldrums. Will a continued reduction in the cost of solar technologies enable the rooftop sector to take off and pick up the slack created in the industry by a slowdown in the solar farm sector? Or will both parts of the industry be hamstrung by reductions to incentives that make them temporarily financially unviable, leading to a hiatus in new development and the thousands of lost jobs and millions in lost investment that will result?

Meanwhile, the outlook for solar farms is even more murky. As of next April new solar farms with more than 5MW of capacity will have to compete for support through the contracts for difference (CfD) mechanism with other renewables projects, including onshore wind farms. The STA maintains CfDs are simply not suitable for the relatively small scale developers who dominate the solar farm sector. Moreover, while the industry thinks continuing cost reductions will allow it to compete with onshore wind farms from 2017/18 it fears it will initially be undercut by wind farm developers in any CfD auctions, again leading to a development hiatus. Will these warnings prove well-founded or will sharper than expected reductions in solar costs and policy savvy developers allow solar farm development to continue? What impact would the mooted Tory ban on new onshore wind farm development have post 2015? Could such a ban clear the way for solar farms to pick up more of the CfD contracts as onshore wind farms fall by the wayside? Again, no one knows what will happen.

As with all the other policy changes imposed on clean energy developers in recent years, this latest round of uncertainty will push up the cost of capital, undermine investor confidence, and almost certainly slow the transition to a low carbon economy. No doubt Ministers can justify the controversial changes on the grounds that budgetary concerns make them unavoidable, but concerns over the LCF budget have to be taken in context. Calculations from the STA based on the government's own numbers suggest that solar technologies will account for roughly five per cent of next year's RO and CfD budget. "Even if large scale deployment is doubled to 4.2GW this year cumulatively, solar will make up £280m or nine per cent of the 2014/15 RO/CfD budget," the trade body said in a briefing note released this morning.

The focus on budgets and costs also opens up a much wider debate, about the cost effectiveness of the energy mix the government appears to be attempting to engineer. Not only is solar staggeringly popular with a recent poll showing 85 per cent public support for the technology (and little evidence as yet to back up ministerial concerns that rural solar farms could face increased local opposition), it also boasts the fastest falling cost curve of any clean energy technology. Solar is widely expected to undercut both onshore wind and nuclear power before the end of the decade, but the chopping and changing to solar policies suggests the government is happy to put those cost reductions at risk while focusing on developing more costly forms of clean energy.

Just a few weeks after Conservative MPs signalled they wanted to bring down the curtain on the currently most cost effective form of clean energy, onshore wind, the government has now dealt a major blow to the future most cost effective form of clean energy, solar farms. Meanwhile, other more costly forms of clean energy, such as offshore wind, nuclear power, and marine energy, continue to enjoy much higher degrees of policy stability. We still need to pursue the full gamut of clean energy technologies in pursuit of the most secure and cost effective mix, but following recent attacks on wind and solar energy it is increasingly difficult for the government to pretend that it is pursuing a technology neutral, lowest possible cost strategy.

The most depressing aspect of the latest proposed changes for the solar industry is that it did not have to be this way. A package of proposals worked out in conjunction with the industry could have eased pressure on the LCF budget and throttled back the current boom in development, just as a modest increase in support could have kick-started the large scale rooftop market ministers insist they want to see. Planning rules, new industry best practices, and an increased focus on community-owned developments could have continued to restrict the roll out of inappropriately sited projects. An increased focus on energy storage technologies and R&D, coupled with a more stable policy environment, could have led to a further acceleration in solar technology cost reductions. And a renewed assessment of the government's clean energy budget that was genuinely focused on value for money would have led to the conclusion that nurturing a still marginalised solar industry would lead to a significant reduction in the overall cost of decarbonisation. No one wants to see technology wars between different sources of clean energy, but if keeping the solar industry on an even keel means rowing back support for some more costly energy sources (or better still imposing higher taxes on fossil fuels) then that might be a price worth paying.

My bet is that while the solar industry is right to be angry at the latest wave of changes, it will once again win out in the end. The technology is so popular, costs are falling so fast, and its appeal is so wide-ranging that solar will survive the current wave of disruption, albeit with plenty of collateral damage in the form of a development hiatus and the lost jobs and investment it brings with it. The government will have once again demonstrated it still does not fully comprehend the critical need to prioritise decarbonisation and accelerate investment in clean energy, but solar firms will eventually find a way to make large scale rooftop solar and solar farms work. Although, judging on past form, it is at that point that they will be hit once again by a renewed effort to hamper deployment.

Thomas Edison was right when he said, "I'd put my money on the sun and solar energy". The problem is that now we have the technologies that Edison dreamed of, constant policy changes are continuing to delay its deployment. It is worth quoting the less famous half of Edison's comment on the power of the sun and the potential for solar power: "I hope we don't have to wait until oil and coal run out before we tackle that." Sadly, we're all still hoping.

The green economic consensus: it's stronger than you think

07 May 2014

Israel's first photovoltaic power plant Ketura Sun installed by Siemens

The growing consensus is that the consensus has shattered. Speak to green-minded executives, politicians and campaigners and there is palpable concern that the political and corporate consensus on the urgent need for decarbonisation that helped push the green economy up the agenda in recent years is now in vertiginous decline.

There are reams of evidence to support this consensus. In the UK, the rise of UKIP and its policy-free climate scepticism, the Tories' open hostility to wind farms, Labour's failure to (yet) put the green economy explicitly at the heart of its industrial strategy, and the anti-green diatribes of many within the media all point to the erosion of the political consensus on climate change that characterised the run up to the 2010 election. Globally, backsliding on green commitments from the likes of Japan, Australia and Canada, coupled with the continued scientific illiteracy of Congressional Republicans, similarly suggests that the consensus that underpins UN climate talks is more fragile than ever. Meanwhile, in board rooms around the world impressive commitments to develop greener business models are constantly offset by fossil fuel companies' rapacious desires to develop new reserves and the failure of the majority of business leaders to prioritise decarbonisation.

Faced with these realities and the slowdown in clean energy investment that resulted last year, it is easy to see how proponents of the green economy could get dispirited in the run up to the crucial UN climate summit in Paris next year.

However, tempting as it may be to wallow in this depressing narrative, there is a counter-argument which suggests that it is far too early to consign the political and corporate consensus on climate action to the history books. In fact, there are plenty of signs that it is enjoying a renaissance - you just need to know where to look.

This week has seen two contrasting examples of the continuing strength of this consensus from the political and business communities.

First up, the G7 meeting of energy ministers to discuss energy security issues thrown into sharp aspect by the security crisis in Ukraine evidently morphed into a wider discussion of climate security and the urgent need for decarbonisation. The G7 nations of Canada, France, Germany, Italy, Japan, the UK and the US publicly and unequivocally agreed that "reducing our greenhouse gas emissions, and accelerating the transition to a low carbon economy" would provide "a key contribution to enduring energy security". Consequently, they all committed to enhancing energy efficiency measures, diversifying energy supplies, and "promoting deployment of clean and sustainable energy technologies and continued investment in research and innovation".

It is worth reflecting on that commitment for a moment. When energy security risks are highlighted, Canada, which has long been regarded as a petro-state opponent of ambitious climate action, Japan, which recently watered down its emissions targets, the US, which is repeatedly criticised for blocking progress at international climate talks, and European powers, which according to some in the media are increasingly ambivalent towards decarbonisation efforts, all agree to make energy efficiency and low carbon domestic energy a top priority. They do so because the benefits of decarbonisation from both an energy security and climate change perspective are unanswerable and firmly embedded within mainstream political thinking. This is the new normal.

You can see why UN Secretary General Ban Ki-moon is quietly optimistic at the prospects for his crucial climate change meeting in New York this September. As he wrote this week: "An increasing number of government leaders, policymakers, businesses, investors and concerned citizens are beginning to comprehend the costs of climate change. More crucially, they are also learning that affordable solutions exist or are in the pipeline to reduce greenhouse gas emissions and support resilience... Change is in the air - I can sense it at all levels of society. Solutions exist. The race is on. My challenge to all political and business leaders, all concerned citizens and voters is simple: be at the head of the race."

Secondly, today sees the launch of a new business-led campaign from the Aldersgate Group entitled An Economy That Works, which aims to highlight how there is "no credible alternative" to developing a new green economy that is "smart, low carbon and resource efficient". There have obviously been plenty of previous attempts by business groups and environmental campaigners to highlight the myriad economic benefits associated with a green economy. But this latest initiative is particularly impressive in the breadth of its support and the manner in which it addresses the systemic benefits a more sustainable economy will deliver through improved employment, competitiveness, innovation, investment, well-being and health, not to mention environmental gains.

The campaign is backed by a raft of blue chip firms, including Asda, Bank of America Merrill Lynch, BT, Cisco, Kingfisher, M&S, Nation Grid, Nestlé, Philips, Sky and Thames Water, as well as a host of NGOs. Yes, many of them could be characterised as the 'usual suspects' who have led green business thinking for much of the past decade, but that consistency of support for the low carbon economy is remarkable in itself. Several blue chip multinationals, many of which generate billions of pounds in revenues, want to see the near complete decarbonisation of the economy over the coming decades and are developing their long-term strategies accordingly.

Moreover, these titans of industry are supporting this campaign not because they have suddenly converted into lentil-munching hippies, but because they understand that it is the best course of action for their business.

As the CBI's John Cridland puts it, there is "a hard-nosed economic argument that moving to a low-carbon economy can drive significant business investment and create many new jobs across the country". Kingfisher's Sir Ian Cheshire is similarly revelatory on the scale of the challenge to economic orthodoxy he is endorsing: "Instead of the goal of maximum linear growth in GDP, we should be thinking of maximum wellbeing for minimum planetary input." Meanwhile, M&S' Marc Bolland is clear that the retail giant's environmental commitments are driven by traditional business concerns. "The commercial imperative for action is clear," he says. "Our research shows that UK businesses have the opportunity to unlock around £100bn a year in value from new innovation opportunities that address social and environmental challenges."

Meanwhile, growing numbers of investors are adapting to this reality and starting to wonder if the emergence of clean technologies and escalating climate risks mean they should hedge their bets against the creation of an unsustainable carbon bubble. As Stanford University's President John Hennessy succinctly put it when explaining this week why the university would no longer invest in coal projects: "The university's review has concluded that coal is one of the most carbon-intensive methods of energy generation and that other sources can be readily substituted for it."

Similar green business initiatives in all of the world's major markets prove that these leading businesses and investors are not alone. Again, it is worth reflecting on the commitment these corporate giants are making. The likes of Unilever, Nestlé, Asda and Philips, as well as Apple, Tesco, IBM, Virgin and thousands of other successful businesses, want to see the creation of a low carbon global economy and are developing business strategies, directing R&D dollars, and spending political capital accordingly. They do so because they recognise that the low carbon transition will not only mitigate against huge risks to their business but present the biggest economic opportunity of this century. This is the new normal.

Of course, this upbeat assessment of the green economic consensus comes with an oil tanker full of caveats. With a few honourable exceptions, the fossil fuel industry continues to demonstrate a staggering insouciance towards the climate risks we all face. Politicians remain much better at endorsing G7 communiques on the need for climate action than they are at delivering the ambitious policies that will deliver such action. For every business campaigning for decarbonisation, there are many more with their heads in the sand. In many countries, including the UK, the media's unthinking defence of the status quo means it is failing to tell one of the most exciting economic stories of the past 100 years.

But none of these valid concerns is sufficient to shatter the consensus on the urgent need to tackle climate change and build a more sustainable economy. There may be huge disagreement in business and political circles about how to deliver it, but the goal of a greener economy is rarely up for debate in the corridors of power, while polling shows it is an industrial revolution the public wants to see. By talking down the wide-ranging support that still exists for ambitious action on climate change environmentalists are in danger of seeing the block of felled wood, while missing the acres of healthy trees.

We can and should criticise specific failures to deliver sufficiently ambitious low carbon policies and investment, but green businesses, politicians and campaigners need to be wary of fuelling the impression that the green economy is constantly in crisis. The truth, as this week's G7 meeting and the Aldersgate's Group's campaign demonstrate, is that the outlook has never been brighter: clean tech investment is climbing again, clean energy costs are falling, and the big scientific and economic arguments over the necessity and efficacy of a sustainable economy have been won.

And if you are still not convinced ask yourself this: would you rather be a young executive working in a coal industry that is facing increasingly hostile questions from investors, tightening regulations, and intensifying competition from alternative technologies, or would you prefer to work in a clean tech sector that enjoys overwhelming public support, falling cost curves, and policies designed to help you break into the mainstream? I'd suggest that, as with so much else, the consensus will lean towards the greener option.

Sir David King: "Climate change is not the biggest challenge of our time, it's the biggest challenge of all time"

30 Apr 2014

Sir David King

"Climate change is not, in the Foreign Secretary's words, the biggest challenge of our time, it's the biggest challenge of all time."

Those were the words last night of Sir David King, erstwhile chief scientist and current Foreign Office adviser on climate change. He was speaking at the annual Chairman's Dinner for the Carbon Trust (a rather delicious vegetarian meal, since you ask, in consideration of the planet and waistlines), where King responded to a question I posited about arguably his most famous intervention in the climate change debate, namely his 2004 assertion that climate change was a bigger threat than terrorism.

Is climate change still a bigger threat than terrorism, I asked, and assuming the answer is yes, can you envisage a warning that would convince politicians to take the steps needed to tackle the threat? It was, I'll admit, a slightly unfair question, given no one has yet worked out what it will take to get our political class to deliver climate action commensurate with the scale of the threat. But it was a useful reminder to hear one of the world's leading scientific figures reassert that climate change is a threat nonpareil, an existential challenge to the global economy and our way of life.

King's chilling assessment of the scale of climate risk brought to a close an evening in which he had been remarkably upbeat about the prospects for both an international climate change treaty and an effective response to the climate threat.

He acknowledged the prospect of a "Berlin Wall" between the OECD and non-OECD countries at the ongoing climate change negotiations. But he tempered that warning by arguing that China and US were in a better position than they have been in years on climate policy, while European nations could point to the gift they have delivered the world through the feed-in tariffs that have helped slash renewables costs over the past decade.

He also welcomed the happy coincidence that will see this year's crucial UN climate summit hosted in Lima - a summit King said was in many ways more important than next year's Paris Summit as it has to deliver the groundwork for a scheduled agreement in 2015. King predicted that the progressive stance many Latin American countries have taken on climate policy could play a crucial role in bridging the divide between industrialised and developing countries that has marred all previous UN climate talks.

He was similarly optimistic about encouraging progress from clean technology developers and financial markets. He described the "carbon bubble" hypothesis as critical to shaking financiers out of their chronic short termism and hailed the emergence of low cost renewable energy and energy storage technologies as the breakthrough that makes a genuinely low carbon economy viable.

However, for all this optimism the speech was bookended by a daunting realism that rather took the gloss off the coffee and chocolates. The evening closed with King's description of climate change as "the biggest challenge of all time" and opened with him highlighting the importance of the IPCC's recent endorsement of a global carbon budget - an assessment that shows how a two per cent a year increase in emissions will mean the available budget for a 2ºC world will be burned through by 2043. Add in the risk that climate tipping points could be reached even earlier and the demographic forces that are expected to soon result in a global middle class of five billion people and you would be forgiven for thinking the scale of the climate challenge is fast becoming insurmountable.

King insists it is not yet insurmountable and he is travelling the world trying to convince others that an escape route is indeed available. "I have to feel optimistic," he says. "But the challenges of staying below 2ºC are frankly enormous."

The former chief scientist is right, of course, we have the technologies, expertise, and policies we need to tackle climate change and it can be done while improving, rather than harming, living standards. But he is equally right when he describes climate change as an unprecedented global challenge and his assessment of the scale of the risk, just like his previous comparison with the threat of terrorism, demands a response from business, and most of all, political leaders.

The key question - the question I have asked so many times over the years of politicians and business executives - is if you accept climate change is an existential threat, why is your response not commensurate to that threat? Again, it is a slightly unfair question, as like most people, the steps I take personally to respond to climate change are singularly inadequate. But then again I don't get to write national policy or decide how to invest millions of pounds, so I think the question remains valid, if a touch hypocritical.

From time to time people are honest enough to admit their response is nowhere near sufficient and they are committed to working on more ambitious measures. But the most typical answer to this question is a blustering insistence that policy A or investment B is indeed an adequate means of tackling "the biggest challenge of all time". If only that were really the case.

The reality is we cannot deal with "the biggest challenge of all time" if we continue to subsidise fossil fuels, if we chop and change clean energy policies on an annual basis, if we ease planning rules for new fossil fuel developments and impose new restrictions on green alternatives, if we neuter energy efficiency schemes, if we refuse to consider divesting from polluting assets, if we put some solar panels on the roof and think we've done enough.

I know that in each of these cases there are complex and compelling reasons why compromises need to be struck between the need to decarbonise and other considerations. I also know that it will only be possible to build a sustainable economy if it is deemed affordable and attractive by the public.

But King's latest warning offers a timely reminder that the success or failure of any given climate change policy, technology, or initiative has to be measured against its ability to help tackle the biggest challenge humanity has ever faced. We're not messing around here; we are talking about the viability of the global economy and the health and prosperity of this and future generations. That may sound terrifying, perhaps even more terrifying than terrorism, and as such it is vital that we don't lose sight of the huge opportunities that tackling this problem offers.

But, as King explains, climate change is not just a bigger threat than terrorism, it is the biggest threat we have ever faced. Political and corporate leaders need to stop trying to pretend otherwise and prove they are up to the challenge.

Where is the Tories' alternative decarbonisation strategy?

28 Apr 2014

David Cameron at Conservative Party Conference 2013

What are the Tories thinking? I ask not as an incredulous environmental campaigner or green investor, even if the angry rhetorical questions being asked as to how the Conservatives can countenance blocking one of the UK's cheapest forms of domestic clean energy at a time when an increasingly hostile foreign power is using energy supplies as a weapon are entirely justified. No, my question is not rhetorical. What are the Tories thinking? Or, more specifically, what is the Conservative strategy for decarbonisation post-2015?

Last week's announcement by Energy Minister Michael Fallon that a Conservative government would end subsidies for new wind farms and further tighten planning rules for turbines may be deeply frustrating for environmentalists and energy investors. It may also be taken as conclusive evidence of our Prime Minister's political hypocrisy and lack of defining values. But the proposal for an effective moratorium on new onshore wind farm development, the alleged talk of 'green crap' within Number 10, and the conversion of cabinet ministers into lobbyists for the shale gas industry is simply democracy in action.

It may represent a contradiction of much of what the Conservatives stood for going into the last election, but the rise of UKIP means the electoral plates have shifted and as such the party is perfectly entitled to go into next year's election promising to renounce its recent past, bring the curtain down on UK onshore wind farm development, and generally dilute green policies.

We can argue about whether issues of long-term import to national security and prosperity really should be decided by what electoral strategists think will play best with the couple of hundred thousand swing voters in marginal seats. But constitutional reform is once again off the political agenda and hoping for political leaders who are willing to put the national interest ahead of their electoral concerns is like hoping for a patient football club chairman - a nice idea, but it is never going to happen.

We can also argue about whether a vote for the Conservatives at the next election really is a vote against onshore wind, given polling shows strong support for renewables across supporters of all parties. But our electoral system does not allow for referenda on every issue and as such anyone wanting to vote Tory because they support the party's "long term economic plan" or promised EU referendum will also have to vote against the expansion of one of the most cost effective forms of renewables, even if they are privately in favour of wind farms.

However, the fact remains the Tories have evidently done the electoral maths and decided a strategy of all out attack towards onshore wind farms accompanied by barely concealed hostility towards other green issues could prove a winner. It is now up to voters to prove whether these calculations are accurate or not (encouragingly the response by Labour and the Lib Dem's to the latest Tory attack on wind farms suggests they are equally convinced there are votes in publicly supporting renewable energy).

However, if the Tories are perfectly entitled to embrace an anti-wind farm strategy, what is harder to justify to either voters or businesses is a failure to explain how this new energy policy fits into a wider decarbonisation strategy.

UKIP's anti-renewables stance at least has the benefit of being consistent with a scientifically illiterate dismissal of climate change risks, but the Conservative's have no such luxury. Barring a full blown takeover by the party's "Tea Party tendency", the Conservatives are unlikely to go into the next election promising to repeal the Climate Change Act, just as David Cameron will find it hard to campaign by disowning his recent assessment of climate change as one of the biggest threats facing the UK. To do so would condemn one of the UK's great political parties to previously unexplored Faragian levels of cynicism and hypocrisy.

As a result, if the Tories want to make a virtual moratorium on new onshore wind farms and the creation of a giant shale gas industry the central planks of their energy strategy then they also need to explain how this approach fits into a long term decarbonisation strategy for the rest of this decade and beyond.

Simply stating, as Michael Fallon did last week, that the UK has enough renewables in the pipeline to meet its 2020 targets is not good enough. Such an approach ignores the central message of the IPCC report - namely that early action to cut emissions is more cost effective than delayed action - and will only push up energy bills by increasing the UK's reliance on more costly forms of low carbon energy.

There has been vague talk in Conservative circles of solar and offshore wind energy playing a bigger role in the UK's energy mix during the second half of the decade to compensate for less onshore wind energy coming online. There has been vague talk from the Prime Minister of carbon capture and storage playing a crucial role in cutting emissions through the 2020s. There has also been vague talk of an increase focus on energy efficiency, even if it is contradicted by Number 10's disgraceful decision to water down existing energy efficiency policies in pursuit of a short term and marginal reduction in bills. However, none of these mooted ideas could seriously be described as a comprehensive decarbonisation strategy, let alone a means of  compensating for the emissions that would result from ending onshore wind farm development and ramping up fracking activity.

The Conservative's have form in this area. Last year, they attacked Labour's decision to support the early adoption of a decarbonisation target for the power sector for 2030, using deeply suspect calculations from Conservative HQ to argue that the decarbonisation target Labour voted for would push bills up £125 by 2030. But the Tories then failed to explain how they would decarbonise and meet the requirements of the Climate Change Act at a lower cost. For what it is worth, the independent Committee on Climate Change maintained, and still maintains, that a decarbonisation target for the power sector represents the most cost effective way for the UK to meet its carbon targets throughout the 2020s.

Fallon and co can propose an end to new onshore wind farms if they want to, but if they want to be taken seriously on energy policy, if they want to avoid charges of rank hypocrisy on green issues, and if they want to be regarded as responsible leaders on climate change, then they need to clearly explain what their alternative decarbonisation and climate change strategy looks like. We expect manifestos and policy commitments to be budgeted from a financial perspective, but in an age of climate change they need to be budgeted from a carbon perspective too. If a party wants to weaken efforts to cut emissions in one area they need to clearly explain how they will strengthen efforts in another area. 

As such, the Conservatives need to explain why they want to effectively end development of new onshore wind farms and why aesthetic considerations trump all else. They need to explain what other forms of clean energy they will increasingly rely on from 2015 onwards and what the cost implications are of shifting the focus towards more expensive energy sources (if Labour has any sense it is doing the maths right now and preparing an attack ad pointing out how much Tory opposition to wind farms will add to consumer bills). They need to explain how they plan to improve UK energy efficiency and live up to the Prime Minister's pledge to make the UK one of the most efficient countries in Europe, even after the self-same Prime Minister was the main driver behind weakening existing efficiency policies. They need to explain how shale gas and CCS fit into a modern low carbon economy, and they need to explain what role they see for nuclear power. They need to explain how they plan to increase spending on climate adaptation in an era of ongoing public sector spending cuts. And, thanks to the confusing and contradictory messages coming from senior Conservative politicians, they need to publicly confirm whether they really do remain committed to decarbonisation.

Failure to do so would leave voters, business leaders, and investors with no choice but to conclude the Prime Minister was not being serious when he said he was serious about tackling climate change and leading the greenest government ever, just as they will also have to conclude that he cares more about pandering to the right wing of his party than acting in the long term interests of the country. You expect this kind of inconsistent policy confusion from UKIP - an apparently non-racist party that repeatedly puts forward racist candidates, while espousing environmental policies that appear to be sourced from internet trolls - but a party of government is held to higher standards.

So what is it going to be? Are we going to see the unveiling of a credible alternative Conservative decarbonisation strategy? Or are we going to see the torching of Tory green credentials and an election fought on anti-environmental spin that undermines investment, increases energy costs, and damages national security? The election may still be a year away, but we need to know what the Tories are thinking.

Come back to us when you've got some LEDs

22 Apr 2014

bentley-factory-from-the-air-project

The lobbyists certainly earned their fees. The case for easing energy costs for UK manufacturers was made so effectively ahead of last month's budget that Chancellor George Osborne froze a tax he had introduced just two years before, seemingly forgot the tax was a replacement source of revenue to compensate for corporation tax cuts he had previously handed industry, and found yet more cash to round his energy cost compensation package up to £7bn. Add the windfall those industrial firms that have been hording EU emissions allowances will now enjoy as the carbon price continues its modest recovery and it has been a pretty fantastic few months for UK manufacturers - just so long as they are willing to turn a blind eye to the negative impact Osborne's reforms are likely to have on the decarbonisation efforts they are, for the most part, signed up to.

The reason manufacturers' lobbying proved so effective was that they had a genuinely compelling case to present. The UK may not be the only country in Europe with relatively high energy costs, but the upward trajectory of the carbon price floor would have led to escalating competitiveness issues over the course of the decade. Moreover, Germany provides a model for how compensation packages for manufacturers can address competitiveness concerns without necessarily undermining decarbonisation policies, even if it means more of the short term costs have to be shouldered by consumers.

However, the key question for Osborne should not have been 'how do I compensate manufacturers', but 'how do I tackle competitiveness concerns while continuing to accelerate decarbonisation?'

I've already argued the £7bn compensation package should have been accompanied by a comprehensive green industrial strategy backed by the kind of serious R&D spend required to deliver the next generation technologies we need to decarbonise heavy industry. But there is another step Osborne could and should still take that would actually help cut emissions, improve manufacturers' competitiveness, and drive investment. He should make the government's significant compensatory largesse dependent on manufacturers taking proactive steps to invest in energy efficiency and cut their emissions. If the government is providing a £7bn package on top of corporation tax cuts, and if there is now talk amongst manufacturers about the UK being so competitive re-shoring is a distinct possibility (which it is), then where is the quid pro quo?

There are actually some schemes, such as the Climate Change Agreements, that seek to incentivise emission reduction measures using the carrot of lower taxes, even if they are widely criticised for not demanding particularly ambitious decarbonisation measures of the companies that qualify for tax breaks. Meanwhile, Osborne actually took a modest additional step towards this approach in the Budget, making an exemption from the carbon price floor available to manufacturers operating ultra-efficient combined heat and power plants. But the fact is he could have been much more ambitious in linking compensation payments to carbon efficiency improvements.

The suggestion that financial support should be made dependent on action to enhance efficiency has been knocking around for some time, but it has been quietly opposed by much of the manufacturing lobby on two grounds - that it would be too bureaucratic to administer and it would be unnecessary on the grounds that high energy costs already provide manufacturers with every incentive they need to embrace efficiency.

However, do either of these objections really stack up?

For good or ill there is already a lot of bureaucracy (or progressive legislation, depending on your point of view) governing manufacturers' carbon emissions and energy use. It should not be beyond the wit of government minister to take the information obtained from the climate change levy, emissions reporting rules, or health and safety inspections and attach a clause to all compensation measures that allows the government to claw back some of the money at a later date if companies either fail to reduce their carbon intensity or fail to demonstrate that they have deployed energy efficiency measures.

The second objection, that manufacturers are already optimised from an energy efficiency perspective, should have more validity - and for some best in class firms it no doubt does. But is it really the case that every manufacturer benefitting from the new compensation package has LED lighting throughout their facility, electric cars on site, comprehensive insulation, and processes in place for checking compressed air systems are leak free? I'm guessing not.

If the Treasury was really committed to decarbonisation and manufacturers were really committed to optimising their long term competitiveness neither would have any problem with a sliding scale of compensation that rewards those who invest some of the money they receive in cutting their emissions.

The counter to this argument is that manufacturers can't afford it. Despite the often relatively rapid returns on investment offered by energy efficiency measures, many companies are unwilling or unable to find the capital they need to install LED lights or roll out the latest automated, optimised production line.

But this problem is just further evidence of a separate market and policy failure - namely the inability of the finance community to provide the targeted loans that would overcome the barriers to investment in energy efficiency measures. The banking sector had taken a well-deserved kicking over the last seven years, but to its litany of scandals must be added the utter failure to harness the power of responsible finance to drive mass investment in relatively low risk energy efficiency measures. Lord Adair Turner was right when he said much of banking had become "socially useless" - green finance should be the route to rediscovering the sector's social purpose.

There are a number of public and private energy efficiency financing options available for manufacturers, but a Treasury that was committed, in George Osborne's words, to becoming "a green ally, not a foe" would be looking to expand these offerings significantly, ideally by allowing the Green Investment Bank to borrow at ultra-low rates. It could then make energy cost compensation commensurate on energy efficiency improvements that would cost manufacturers nothing up front and would deliver net financial savings over time. Those who had already genuinely embraced green best practices should be allowed to pocket their compensation, and perhaps encouraged to start thinking about whether investment in renewable energy and decarbonisation R&D makes sense.

This corporate tribute to the Green Deal and pole-axed consequential improvements rule would cut manufacturers' energy costs, enhance their efficiency, and cut carbon emissions. Those manufacturers who continue to complain about energy costs should be politely but firmly told to come back when they have installed LEDs. Only those that have done precisely that should be rewarded with access to the Treasury's full compensation package.