Showing posts from November 2012

Energy Bill: The good, the bad, and the ugly

23 Nov 2012

georgeosbornegasman

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.

The bad

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.

The ugly

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.

The best green economy speech I ever heard

23 Nov 2012

bruce-j-oreck-ambassador

It will be three years ago this winter that I heard the best speech on the green economy that I have ever heard.

It lasted no more than four minutes and provided the most exquisite riposte to the tired arguments about the unacceptable costs of transitioning to a low carbon economy. It came from the unlikeliest of sources and posited a case for the green economy that has become ever more important in recent months, as studies warning about climate impacts have metastasised and the voices of vested interests desperate to protect the status quo have grown ever louder. I can't count the number of times I have wished I had the eloquence and the confidence to deliver a similarly devastating speech. This is how it happened.

I was in Helsinki as part of Foreign Office initiative to promote the UK's Climate Change Act overseas and had been tasked with providing a perspective on why many British businesses supported the legislation and its binding emission reduction targets.

The presentations from myself, the man from the Foreign Office, and one of the UK's leading climate scientists went pretty well and the floor was then opened up to questions from the 100 or so Finnish civil servants and business leaders in attendance. The discussion started off broadly positive, but in a manner that will be familiar to anyone who has attended debates on the green economy it quickly drifted towards concerns about the cost and viability of meeting the Climate Change Act's targets and genuinely transitioning to the low carbon economy.

One executive in particular – I think I'm right in saying he worked for Finland's sizable paper mill industry – repeatedly trotted out all the legitimate yet short-sighted arguments levelled against climate change policy the world over. "We have to mindful of the cost," he argued. "How will we compete with overseas competitors?" he asked. "Of course, we need to tackle climate change," he maintained, "but we can't be too ambitious about it, we can't take too many risks."

It was at the point this litany of complaints reached its apex that a man in the front row seized the microphone and stood up. "I've been listening to this debate quietly, but that's it, I've heard enough," he said – he actually said that, "I've heard enough". He was a big man, who clearly spent a lot of time in the gym and he immediately commanded the room. It was the US ambassador, Bruce J. Oreck.

A lawyer by training and apparently a former body-building champion, Oreck is the head of the US League of Green Embassies and is one of the most powerful advocates of climate change action within the US State Department – those arguing for a watering down of green ambitions stood no chance.

It is almost three years ago so I cannot remember Oreck's diatribe verbatim, but I'm pretty sure it started along the lines of "with all due respect sir, you do not know what you are talking about".

"Do you know what the largest employer on the eastern seaboard of America was in 1850?" he asked the room, to be greeted by the inevitable silence. "It was whaling."

He went on to explain how New Bedford was once the world's biggest boom town, how whaling was one of America's largest industries, and how tens of thousands of people made their fortunes from the whale oils, blubber, and bones they bought ashore. And then, how within 20 years, it was all virtually gone.

There are actually a variety of reasons why America's whaling industry collapsed to do with rising costs and a dwindling of supply as whales were hunted to near extinction, but the main cause was remarkably simple – businesses invented something better. As Oreck explained, the gas street lamps that began to emerge just as the industry peaked in the 1850s and the electric bulbs that followed a few decades later eviscerated the demand for whale oil just as surely as Massachusetts' whalers eviscerated the whales. Add in the growing difficulty of catching over-hunted whales and the development of a host of synthetic materials to replace various whale products and the industry was completely dead within 50 years.

As if the parallels with today's carbon intensive industries weren't already explicit enough, Oreck spelt them out. "If you don't adapt, your business is going to die," he told the hapless man from the paper sector, or words to that effect. "You don't have a choice. Right now, new and better and cleaner technologies are being developed all around the world and they are going to blow you out the water."

And that was it. It only lasted a few minutes and it only made one point – that the emergence of better technologies has always killed off incumbent industries that are unable to adapt to new realities – but it was one of the most effective speeches on the green economy I have ever heard, and definitely the most effective take down of the tired arguments protecting the carbon intensive status quo I've ever come across. What's more it didn't even have to mention climate change, although the climate side of the argument came later in the day, when Oreck admitted the research the State Department and CIA were doing on climate risks was little short of terrifying.

It is also an argument that has become ever more important as a number of carbon intensive industries and interests have responded to the opportunity presented by a global economic slowdown to argue ever louder about the cost of climate change action.

Of course, at a micro level they have a case, there are serious problems with energy costs, carbon leakage, and the still immature nature of some clean technologies. Clever policies are still needed to overcome these challenges and ensure the shift to a greener economy is achieved in a managed fashion, without the societal and economic damage that otherwise comes with the rapid collapse of established industries and the bursting of financial bubbles associated with overvalued assets.

But at the macro level, as the latest reports of grave climate impacts have proven, the green economic transition is inevitable. There is the mounting evidence emerging clean technologies are not just reducing carbon emissions, they are also outperforming and under-cutting carbon-intensive incumbent technologies. High carbon businesses can either accept this reality and join the low carbon transition or find that within a few decades they have more in common with America's whalers than a casual disregard for the natural world.