The UK’s energy policy has descended into dangerous farce

The UK Conservative Government is pursuing a dangerous path on energy, which could lead to lights going out next year.

The UK's Conservative Government is preoccupied with what it calls an "over-allocation of renewable energy subsidies". Lest you think this signifies a surplus of renewable energy in the UK, it simply means that the amount of money permitted to be spent on building renewable energy capacity by the Treasury, known as the Levy Control Framework (LCF), has been exceeded. This ideological policy is not based on any scientific or independent economic evidence but on a willingness to please a certain sector of Tory supporters.

The cuts are being made under the cloak of pretending to be keeping costs down for energy consumers. Yet other energy subsidies the Government is doling out include £26 billion to the oil and gas industry this year (this figure is from an IMF report). Coal, the most climate-unfriendly fossil fuel, will receive nearly £18 billion of this subsidy. And most of the producers are overseas.

It is also promising £40 billion of subsidies for one new nuclear power station (see below for more information).

This compares to £9.1 billion due to support renewable energy.

The latest cuts to the (domestic) renewable industry , announced at the end of last week, prevent renewable energy suppliers from "locking in" the level of subsidies they will receive for the energy they supply in the future from the moment they register as suppliers.

This might seem fair enough, except when you look at the government's other actions on energy, and you see it in the context of wider attacks on the renewable energy industry. These include plans to reduce the tariff for small scale installations (as used on schools and community buildings) from 12.47p per kilowatt hour to 1.63p per kilowatt hour from January, and the announcement at the end of last week of the refusal of planning permission for another offshore windfarm (did you think that the Tories just opposed onshore wind farms on the grounds of visual intrusion? Think again).

You'd think that the Government would want to support a successful industry. According to its own latest figures, renewables’ share of electricity generation increased from 19.6% to a record 22.3% between the first quarters of 2014 and 2015, due to increased capacity, mostly of solar PV and onshore and offshore wind.

But no. These developments are causing chaos in the industry. They have prompted 13 investors, from the  UK Sustainable Investment and Finance Association (UKSIF) to write to Chancellor George Osborne asking them to reverse these cuts. 

The Trillion Fund, a crowdsourcing funding project launched in 2011 with the aim of driving forward of $1 trillion of annual global investment into renewable energy, with 7,000 members, announced on September 10 it would no longer be making any more loans to the industry for the foreseeable future because of the uncertainty generated by the government, and its CEO, Julia Groves has quit.  

EDF Energy as also announced plans to scrap wind farms it was going to build.

Not all Tories agree with the way things are going. There are green Tories, such as Zac Goldsmith, the MP for Richmond Park and North Kingston, who is campaigning to be the Conservative candidate for Mayor of London, who said this weekend that the government should "accelerate not reduce incentives" for clean technology.

The irony is that Britain needs more energy to replace coal plants that are closing. Amongst the recent closures or announcements of closures are the 2GW Eggborough plant, in Yorkshire, which will close in March "because carbon taxes and low wholesale power prices have made it financially unsustainable"; and the 2.5GW Longannet power station in Fife, Scotland, closing because it lost a contract bid. Together, the two plants supply about 8% of the UK's electricity and employee about 520 people.

Meanwhile, the government pursues its obsession with fracking, which is unlikely to produce any new power for many years.

To any impartial outsider, its policies appear to be reckless in the extreme.

Never mind. Having less to do with generating energy supply means that the Department for Energy and Climate Change (DECC) can concentrate most of its effort on what at least two thirds of its budget is actually directed towards: finding somewhere to store high-level nuclear waste. 

Yes, last financial year it cost £3.31 billion a year to manage the nuclear waste mountain, of which £2.09 billion comes from taxpayers [source : NDA], and DECC's total annual budget last year (2014-15) was £3.4 billion. But this figure is not the same every year. In 2013/14, 95.8% of the roughly £7.9 billion DECC budget (£7.5 billion) went towards cleaning up the UK's nuclear legacy. [Source:  Cabinet Office and  DECC annual report and accounts.] 

They've only been looking for a place to store this nuclear waste for 30 years, but the problem is nobody wants it buried in their backyard. A new programme of work also announced last week involves setting up another committee – which will deliberate for another two years. That will give them something to do.

Just as well that plans for a new nuclear power station at Hinckley Point C (the first in 20 years, and which will generate even more waste) have been put back again by French company EDF – despite the fact that DECC would love it to happen.  It's also been delayed because Austria has filed a legal complaint at the European Court of Justic

Of course the exorbitant cost of these subsidies – put at a staggering £40 billion by a nuclear expert – would put up energy prices for consumers by far more than the cost of renewable energy.

The agreed strike price for electricity from Hinkley Point C, were it to be ever built, is set at £92.50/MWh, about double the current price.

EON doesn't like nuclear power either, now that the Germans have seen sense and refused to let their energy consumers for the bill for cleaning up nuclear power. Pity that the UK government won't do the same thing. But of course, looking after the nuclear industry is what DECC mostly does.

It all goes to show that perhaps energy policy shouldn't be left to politicians but, just as the setting of the bank lending rate is outsourced to the Bank of England in the UK, energy policy could be outsourced to an independent body of experts. As David Porter, a former Chief Executive of the UK’s Association of Electricity Producers and Chief Executive of Energy UK, recently pointed out, there is "an awkward mis-match between the investment horizon of a steady, long-term, capital-intensive industry and the capricious nature of politics in a five-year election cycle".

No kidding.

The Green Deal & Germany's EnEv, and how to properly promote energy efficiency

The Green Deal, the British government programme supposed to assist the uptake of energy efficient retrofits and recently cancelled, was a disaster. Here's why.

Households in Europe are responsible for 26 per cent of total final energy use. Reducing energy use has multiple benefits, not just saving money for consumers, and carbon emissions, but improving comfort, health and creating jobs. So clearly it is a desirable thing, but you wouldn’t think so from the British government’s attitude.

To see why, let’s compare it to an extremely successful German version of the same scheme.

Pay as you save

The Green Deal was an example of a “pay-as-you-save” type scheme, where loans are taken out to pay for the energy efficiency measures, and repaid over time from the financial savings created by these measures.

It seems like a no-cost solution and an obvious winner. But not the British government’s version of it.

One of the reasons for this failure was pointed out right at the start by critics, but ignored by government officials responsible for designing the scheme. This was that the 7-10 per cent interest rate on the loan to householders was too high – in fact several percentage points higher than ordinary loans available on the high street. It was simply not affordable.

It also made many measures unaffordable within its own context – the “Golden Rule”. This rule was embedded into the legislation and stipulated that the savings generated by energy efficiency measures must lie within the cost of the measures.

The Green Deal was initiated in 2013 under the 2011 Energy Act. It came with no target or grants. It combined accredited energy advice and installation with finance to be repaid in a period up to 25 years. Finance was attached to the property, and recouped through extra charges on the electricity bill (even if the savings were made on a different fuel, say gas).

The result? 300,259 total Green Deal assessments resulted in only 1815 “live” plans – a conversion rate of just 0.6 per cent!

The government’s goal for the first 12 months of the scheme alone was 10,000 installations.

After seven months and 58,124 assessments, only seven households had taken out plans.

Upfront high property assessment costs (up to £100) made the scheme inaccessible to lower income households and those uncertain of their eligibility for measures.

The German experience

Contrast this with the EnEv programme in Germany, implemented from 1 February 2002 then amended in 2007 and 2009, and replacing the flagship CO2 Building Rehabilitation Programme.

Here, the interest rate on a loan of up to €50,000 from the public bank KfW for the replacement of the heating and domestic hot water systems of a residence (and ventilation and cooling systems installed earlier than 2009) was 1-4 per cent.

The goal here is to use public policy to refurbish the entire housing stock and all public buildings in Germany by 2030.

A million old homes have been retrofitted and 400,000 new highly efficient homes built (this is not just a retrofit scheme). Annual energy consumption was reduced by 900 gigawatt hours as well as energy costs of participating companies by €150m a year.

Here’s how the two schemes compare:

	UK Green Deal (2013–present)	German EnEv (2006–2010)
Interest rate on loan	7.9–10 per cent APR	Publicly subsidised low interest rate (1-4 per cent)
Accessibility	Low – high customer dropout rate – 0.6 per cent successful conversion rate	High – extensive marketing campaigns
Main target market	Homeowners	Landlords and public bodies
Total cost of scheme (annual)	Value of investment: €380–€525 m	Average of €1.4 bn. Value of loans and grants: ~€3bn
Attachment point of loan	Electricity meter	Person or organisation
Outreach	1,815 homes in total	200,000 homes per year
CO2 emissions savings (Mt CO2 per year)	0.3 total	19

Source: Unlocking the Energy Efficiency Opportunity, Element Energy for the SEAI, 2015

The scale of the problem

Now compare the UK scheme’s failure to the scale of the job required. To achieve 2050 carbon emission reduction targets, the UK’s 28 million domestic properties would need to be renovated to a high energy efficiency standard at a rate of 700,000 a year in order to have renovated them all by the year 2050. They also need to be renovated to a high standard, what is called a “deep retrofit”.

Neil Morgan, who was the project director of Retrofit for the Future, set up several years ago by the UK government to find the best ways of meeting this challenge, is on record as saying that around £60-£70,000 is needed for such a renovation. The typical amount under the Green Deal was one-tenth of that.

In Germany under the EnEv scheme, costs in the region of £20,000-£40,000 per property were common.

Given that most homes are only renovated once every 30 years on average, not to do a complete job while the builders are in is a wasted opportunity as total costs would be lower.

But the Green Deal was only meant to take care of the low hanging fruit – efficient boilers, cavity wall and loft insulation. The German scheme goes much further.

Of course, in the UK there is still the Energy Company Obligation program, which requires energy suppliers to undertake retrofits for those in fuel poverty. But this again is only aimed at low hanging fruit.

Meanwhile the country is waiting for an urgently needed replacement for the Green Deal to help bring down exorbitant energy bills.

New Package Will Change Investors' Attitude To The $6 Trillion Energy Efficiency Market

A new package is to be made available to investors, building owners and the low carbon sector that will make investing in energy efficiency as easy as investing in renewable energy. Backed by €1.92 million of European Commission grant-aid, it is hoping to build demand by giving these clients greater confidence and a standardised approach that will reduce the present high transaction costs impeding greater uptake of energy efficiency in buildings.

The scheme is being developed by the Investor Confidence Project (ICP) Europe, a project of the EnvironmentalDefense Fund in the USA, where it is already attracting big name investors in the banking world.

The intention is to build a marketplace for standardized energy efficiency projects by increasing the reliability of projected energy savings. The individual projects can then be aggregated and traded by institutional investors on secondary markets – just like mortgages or other profitable asset-backed securities. As a result, ICP will be of interest to building owners, project developers, finance and energy service providers, insurers, local authorities and utilities.

Steven Fawkes

The scheme is being fronted in Europe by Steven Fawkes (above), descendant of Guy, who is also a member of the Investment Committee of the London Energy Efficiency Fund and comes with 30 years experience of energy efficiency.

"We want to make energy efficiency become an indispensable part of every institutional investor's portfolio. It is potentially the biggest value opportunity on the planet," says Steven. "The world spends $6 trillion on energy so saving one third would equate to $2 trillion savings. And don't forget the co-benefits – real and measurable ones such as improved productivity, health, life-saving and jobs, which often are not considered in the cost-benefit equation.

The European Commission alone puts the size of the investment required at around €100 billion per year. The key to unlocking access to this market, Steven explains, is the ICP System, that standardizes how energy efficiency projects are developed and measured, in the savings projections and underlying investment yields, via a series of Investor Confidence Project Protocols.

"These are equivalent of the standardised approaches investors use when looking at investing in energy supply projects," he says. "Quality is guaranteed through independent assurance, the application of monitored best practice standards to each phase of a building retrofit, and by contracting the work to industry-leading professionals. The result is Investor Ready Energy Efficiency projects."

For investors, the near-term benefit of this will involve a significant increase in deal flow. Increasing the number of fundable projects will in turn result in significant long-term benefits including:

• reduced transaction costs;
• lower costs of capital;
• increases in available credit;
• actuarial data sets.

 From the investors' point of view, limited actuarial-quality project data and industry fragmentation have been discouragements to putting their cash into energy efficiency. To remedy this, ICP Europe is forging strategic alliances with the financial and efficiency sectors to develop renovation projects and industry standardization and embed the Protocols into their financing process.

"At the same time, we're collaborating with government and civil society groups to facilitate the necessary public policies and education activities to support adoption of our products and services," he says. Initially ICP is working in Austria, Bulgaria, Germany, Portugal and the U.K., but the project will later be rolled out across Europe. In the UK alone, it could create over 100,000 direct and indirect jobs, quickly and across the UK.

There's a human angle too – 7 millionpeople live in fuel poverty in the UK, causing poor health and premature death. "26,000 people die of the cold each year, with at least one-third of these deaths due to people living in cold homes," says Ingrid Holmes of E3G.

ICP is backed by the European Commission, whose report, Energy Efficiency – the first fuel for the EU Economy, was published last February by the Energy Efficiency Financial Institutions Group (EEFIG), a group of over 100 organizations, including Deutsche Bank, ING, Allianz and BNP Paribas. Its new Financing Energy Efficiency web site lists ICP Europe as a recommended initiative and the only initiative listed that's independent from the European Commission.

Fawkes concludes: “Energy efficiency has provided more energy services over the last 40 years than any other energy resource, and we did that without really trying.  Imagine what we can do if we make a real effort! In buildings it has high returns without subsidy, is quick to implement and completely clean”.  

Anyone interested in knowing more should join the ally network by visiting http://www.eeperformance.org/europe-allies.html.