DECC’s subsidy budget reaching crisis point, warns Labour MP

The Government's Levy Control Framework (LCF), which is meant to provide clean energy subsidies through to 2020/21, is "effectively completely bust", a Labour MP has warned.

Alan Whitehead, who is also a member of the House of Commons Energy & Climate Change Select Committee, believes the transition from the Renewables Obligation (RO) to Contracts for Difference (CfD) – both of which are controlled by the LCF mechanism – hasn’t worked in the way it should have, thanks to “the dead hand of the Treasury”.

This has effectively led to a budget crisis, meaning a host of large-scale renewable projects will not be built unless new funding is identified, according to the Southampton MP.

Speaking at a conference for the energy-from-waste (EfW) industry in London on Tuesday (16 June), Whitehead said: “The LCF is now effectively completely bust. This is largely for two reasons: firstly, the cumulative effect of CfD awards – i.e. the tail of the contract once it’s been awarded and the way that builds up within the control framework; but also because CfDs – unlike RO Certificates – are based on the difference between the strike price and reference price – which ultimately depends on variables such as gas prices.”

Costly changes

The £7.6m LCF budget is made up from money raised from so-called ‘green levies’ on energy bills. It acts to constrain the total spend on the deployment of all technologies that are delivered through the Government’s three subsidy schemes: the Feed-in Tariff, RO and CfD. As part of the Electricity Market Reform (EMR) support for new large-scale renewable projects under the RO scheme is being replaced by Feed-in Tariff CfDs. 

But, based on the first round of CfD’s that have been awarded, Whitehead believes the Government is now favouring larger schemes without considering the potential energy capacity of other bidding schemes.

“We appear to be going towards a change in underwriting for renewable and low-carbon costs which is likely to cost us far more than they would do if we had gone down a different course,” he said. “The Government is institutionalising deals at a higher cost than would be the case for biomass and EfW plants.”

Urgent case

Whitehead cited the examples of Swansea Bay Tidal Lagoon – which was recently given the go-ahead by DECC. The tidal scheme has a suggested CfD strike price of £168/MWh – despite having a smaller capacity than some proposed CHP and biomass conversion plants, which have an allocated CfD strike price of  £125and £105 respectively.

“It seems to me there is now an urgent political case for starting to put on the table a big change in priorities,” added the Southampton MP. “Future auctions through the CfD scheme within the LCF will largely be awarded to marginal plants.

“As such, there will probably be no more biomass or EfW plants that will obtain CfDs under the LCF up to 2020. Unless we get smarter about the methods of underwriting, the Government threatens to bring EfW and other renewables to a halt.”

Similar concerns were recently voiced by former Climate Minister Greg Barker, who last month told edie that managing an ever-tightening LCF budget will be “the big challenge” for DECC this year.  

Technology mix

Also speaking at Tuesday’s EfW conference was Juergen Maier, the UK chief executive of Siemens – which was hosting the event. Maier agreed that current setup of various policy mechanisms “isn’t particularly favourable” for the EfW sector, and suggested that the Government should instead be focusing on delivering a fairer mix of renewable energy technologies when handing out subsidies.

“The last [CfD] auction – and future auctions I suspect – will not end up delivering the right technology mix that we actually want here in the UK,” Maier said. “At the moment, the whole LCF all goes into a bucket and then it’s the mechanism which is meant to decide what comes out at the other end.

“The Government should consider whether percentages of the LCF should actually be allocated to particular types of renewable energy. One way to do this would be to be more specific about what percentages of which technology mix we want and need, and then do the CfD auctions within those particular technology mix areas.

“That way, I think everybody would be better off – we’d be clear where we’re going, we’d have more confidence in our marketplace and we’d be able to invest in all of those particular technologies.”

Incidentally, the event took place just days before DECC confirmed controversial plans to end new subsidies for onshore wind farms a year earlier than previously expected. In a Ministerial Statement released this morning, Energy Secretary Amber Rudd said she wanted technologies stand on their own two feet, rather than encouraging them to rely on public subsidies. Rudd also hinted that onshore wind could be removed from the CfD mechanism entirely.

Luke Nicholls

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie