edie explains: Levy Control Framework
It is widely accepted that the Government is running out of money to fund it's green energy subsidies.
To understand why thats the case, we should first understand what that budget is and why it exists. That's why this week’s edie explains takes a look at the Government’s Levy Control Framework (LCF).
What is it?
The Levy Control Framework puts a cap on the amount of money that the Department for Energy and Climate Change (DECC) can raise through green surcharges on energy bills.
The cap - £7.6bn in 2020 - is imposed by the Treasury, and meant to ensure that the pursuit of the UK’s decarbonisation goals is carried out at a minimum costs to consumers.
It was brought in in 2011 by the Coalition Government and is set to run through to 2020/21. This Tory Government is expected to set the next LCF budget later in its term.
Why does it exist
The £7.6bn funding is expected to be enough to help the UK generate 33% of its energy from renewables by 2020/21 - enough to meet EU targets.
The framework is needed, because levy expenditure is different to Government spending, in that the cash is raised through consumers via electricity companies rather than directly through taxation.
The LCF is overseen by the levy control board – a combination of Treasury and departmental officials.
Does it work?
According to the National Audit Office, the LCF is a “valuable tool supporting control of the costs to consumers from pursuing energy policy objectives”.
“It should encourage consideration of the trade-offs between schemes that may be needed to achieve the government’s goals while minimising impacts on consumer bills."
Not everyone agrees
Labour MP Alan Whitehead, who sits on the Common’s Energy & Climate Change Select Committee, said the LCF was “now effectively completely bust”.
Whitehead said this was thanks to the cumulative effect of CfD awards, and the fact that CfD payments are based on the difference between the strike price and reference price. Therefore if wholesale energy prices fall, CfD payments get bigger.
Whitehead’s view is supported by former Climate Minister Greg Barker, who warned in May that addressing the dwindling LCF should be Amber Rudd’s top priority.
How much is left?
Policy Exchange's head of environment and energy, Richard Howard, predicts that exisiting projects could take up £6.6 of the £7.6 cap in 2020, leaving little room for new projects.
This is backed up by Climate Change Capital, which expects roughly £1bn p.a. to be left for 2020/21 and £300m p.a. to be left for 2018/19.
The group also says we are essentially out of budget already for 2016/17, with around £150m left for 2017/18.
The Renewable Energy Foundation (REF) was even more concerned, claiming that projects in the pipeline mean the UK is on track to spend £9.1bn in 2020 - £1.5bn more than the LCF cap.
Predicting exactly how much will be left is next to impossible thanks to the nature of the CfD,
What happens if/when the money runs out?
The renewables industry has warned that a host of large-scale projects that are currently in the pipeline, such as offshore wind farms, may not be built unless additional funding is identified.
The axe could also fall on smaller-scale projects funded by the FiT. Another solution could be more of the same in terms of cutting subsidies for mature technology such as onshore wind.
Perhaps the simplest solution would be to simply up the green levies on consumer bills, but that would likely provoke a political firestorm.
Whatever the solution, it is going to be unpopular for some.