Is that it? After rumours of a big change in electricity policy coming (with frothy excitement in energy geek land), Ed Miliband this week lifted the curtain. The headline from the Government comms machine was ‘decisive action’ to ‘break the link between gas and electricity prices’. And yet the reality was uninspiring, underbaked and unambitious.
If you subscribe to the Miliband worldview, the central tenet is that gas is the enemy and the reason why our bills are expensive. This belief drives his Clean Power 2030 mission to get us off gas at breakneck speed no matter the cost, with the Iran crisis only reinforcing his conviction. Never mind that sprinting so quickly to an arbitrary target may end up raising bills by 2030, not lowering them (particularly if gas prices fall in the future).
So with the Government under pressure to ‘do something’ to respond to the Iran War, the Energy Secretary actually set off with a noble aim – decreasing the cost of older renewable energy projects. For those unaware, the current scheme (the Contract for Difference, CfD) guarantees renewable generators a fixed price for their power. Regardless of whether wholesale prices (and the gas prices that influence them) are high or low, we as consumers are locked in at that price for 20 years (the logic is that stabilising revenues in this way is key to unlocking cheap debt to finance the assets).
But the older Renewables Obligation (RO) scheme – used before CfDs, when the technology was less mature – works differently. Generators on this scheme get a subsidy amount (a Renewable Obligation Certificate, or ROC) on top of the usual wholesale price. So an older offshore wind farm will get, say, £130 / MWh via ROCs, on top of the wholesale price of around £80 / MWh last year. Compared to the newest offshore wind farms which got £95-97 / MWh in last year’s CfD auction (itself decently high), £210 / MWh makes even the most hardened environmentalist wince!
Which is exactly why Claire Coutinho called for the Government to scrap the scheme entirely, and why Labour announced at the last budget that 75% of the ROC costs for households will be borne by the Treasury and taxpayers, not bills. So surely the decisive action the Government has taken is renegotiating the ROCs, right?
Err, no. Instead, the Government has decided to go after the wholesale revenue these projects receive, rather than their generous subsidy payments.
Enter a new acronym to the energy lexicon – the ‘Wholesale Contract for Difference’ (WCfD) – whereby RO projects will be given the choice to voluntarily shift to new contracts that ‘de-link’ the revenues these generators earn from short-term spikes in electricity prices (in the wholesale market), while leaving the high subsidy payments untouched.
Remember, in Milibandism, the reason your bills are expensive is gas and only gas, so ergo anything that further reduces the influence of gas on electricity prices is to be welcomed.
But the policy itself is underbaked – many of the crucial details are missing. Indeed, the Government wants to consult on it first (of course) and then ‘run an allocation process in 2027’ – so this is not an immediate fix, and by the time this scheme kicks in, the Iran crisis could conceivably be in the past, meaning gas prices would have returned to normal.
While predicting the future is a fool’s game, it’s little-remarked that gas prices have come down substantially over the last few weeks. (To be clear, moving away from volatile gas is a worthy goal – but doing so in a pragmatic way rather than rushing towards it haphazardly is the way to go).
Additionally, the key word is voluntary; these generators do not have to switch over. So the government has added a ‘stick’ intended to get generators to move onto these contracts through a higher windfall tax, but this is unlikely to have much motivating effect in practice.
The risk thus is that the Government offers overly-generous contracts in the name of protecting billpayers from future price spikes.
It’s worth remembering the original intent of the RO was a period of cheap ‘merchant’ generation after the subsidies expired – so much for that idea. There’s a more fundamental point though, which is the ever-greater creep towards central planning. As each scheme piles on top of the last one, as more of the energy market moves on to government-negotiated contracts, the role of competitive markets is being ever more squeezed out, while costs pile up – intervention begets intervention.
So as a big ticket response to the Iran crisis, this policy is decidedly underwhelming – ‘decisive action’ it is not.
But spiking energy prices have done more than just motivate Government. The Iran crisis has seen surging interest in home solar, electric cars and even heat pumps. This isn’t particularly surprising in a price crisis – consumers are feeling acute pain, and are doing what they can to insulate themselves. An announcement that got far less attention this week but may have a greater impact is plans to introduce permitted development rights for on-street EV charging, unlocking far cheaper home charging for those without a driveway.
And that points at the wider energy security debate – becoming more energy secure is not just about power, it’s about the entire economy. Making the most of what we’ve got in the North Sea, while also encouraging the uptake of EVs – in both cases, you’re reducing our dependency on imports.
But one of the key enablers of this entire strategy is cheap electricity. Without it, convincing consumers and businesses to electrify is an uphill battle, at least without huge subsidies or government mandates. And that’s why Miliband’s Clean Power 2030 mission and all of the circus that goes with it risks missing the forest for the trees. By dashing as quickly as possible to get off gas, and raising bills in the process, he could end up sinking the very ship he’s trying to save.
