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Policy Exchange report to warn that crucial Levy Control Framework budget may already be exceeded

This is worth commenting on, given that Policy Exchange is blatantly to the right of British politics and may therefore have an inherent bias against renewable energy.

The article from Business Green says this:

"Influential think tank Policy Exchange is preparing to publish a major new report detailing how the new government's clean energy plans are at serious risk of being derailed by a lack of funding.

The report, previewed today on BusinessGreen in an article by Policy Exchange's head of environment and energy Richard Howard, will warn the £7.6bn Levy Control Framework (LCF) budget that is meant to provide clean energy subsidies through to 2020/21 using money raised from so-called 'green levies' on energy bills may already have been assigned.

If accurate, Policy Exchange's analysis would represent a huge challenge for in-coming Energy and Climate Change Secretary Amber Rudd and could lead to a drastic reduction in clean energy investment over the next five years.

Official figures from DECC have previously revealed the LCF budget will be tight over the next five years, reaching around £1bn in 2020/21, according to Howard.

The budget cap has previously prompted renewable energy industry insiders to warn that a host of large scale clean energy projects that are currently in the pipeline, such as offshore wind farms, may not be built unless additional funding is identified. Others fear the cap will force ministers to impose steep cuts to subsidies for small scale renewables awarded through the feed-in tariff scheme in a bid to protect the remaining budget.

However, Policy Exchange's Howard suggests the outlook for the renewables sector could be bleaker still, arguing "DECC has significantly underestimated the cost of existing policies" and warning that as such "DECC may have already committed the entire budget out to 2020, which will make it difficult or impossible to proceed with any additional projects, unless actions are taken to stem the rise in other costs".

The think tank's analysis centres on concerns that the currently relatively low wholesale cost of electricity means the government's system of price support contracts, known as contracts for difference (CfD), will be more costly than expected. It also warns the feed-in tariff scheme is in danger of exceeding its budget and the latest generation of offshore wind farms are designed to deliver a higher load factor than DECC expects, putting further upward pressure on the LCF subsidy budgets.

Howard warns the LCF budget could be exhausted just as a system of contract auctions promises to push down the cost of clean energy subsidies.

"The new Energy Secretary needs to take urgent steps to address this situation," he added. "The Conservative Manifesto committed to cutting carbon emissions as cheaply as possible, but did not provide much detail on what this means in practice. Given the state of the energy and climate budget, such an approach now looks not only desirable, but essential."

A DECC spokeswoman insisted the department kept the LCF budget under "constant review", using updated modelling and assumptions to reflect "the challenges in making long-term forecasts in a changing and very active energy market". BusinessGreen understands this modelling accounts for the changes in fossil fuel prices, load factors, and the uptake of renewable energy subsidy schemes that Policy Exchange highlights.

"The new government will be setting out its plans for delivering a new generation of secure electricity supplies at the lowest possible cost to consumers in the near future," the spokeswoman added.

However, DECC's response does not reject Policy Exchange's central allegation that the LCF budget may be under intense pressure. Renewable energy industry sources noted that while there were reasons to believe some budget would remain available for the coming years, the fluctuating nature of wholesale power prices made it extremely difficult to predict the precise size of the budget with confidence.

If Policy Exchange's calculations prove accurate a host of planned clean energy projects could now be under threat.

The green levies that underpin the LCF only account for around seven per cent of average household bills and were not the primary factor behind increases in energy bills in recent years, which were largely driven by increases in the cost of wholesale gas. However, any attempt to increase green levies to extend the LCF cap would likely prove politically toxic, while attempts to free up more of the budget by watering down existing subsidies would almost inevitably spark legal challenges.

Dr Gordon Edge, director of policy at trade association RenewableUK, said Policy Exchange's analysis could prove overly pessimistic, but he acknowledged there was considerable uncertainty over the current state of the LCF budget.

"There are certainly big questions to be answered about the buying power of the LCF, as power prices have gone down since it was set," he told BusinessGreen via email. "It's hard to know exactly how far the fixed budget will go - but Policy Exchange's analysis may be too pessimistic when they claim that it may already be spent or committed to specific projects. We can't be sure of that and it's certainly not what DECC is saying."

However, he added that it would be sensible to conduct a full review of the LCF budget that takes into account how power prices have changed in recent years. "Perhaps the most useful outcome from this research would be if it focused attention on the choices that have to be made on which low-carbon technologies should be funded by the LCF," he said.

The warnings over the state of the LCF budget echo similar warnings from Labour last year over the Energy Company Obligation (ECO) energy efficiency scheme, which experts fear could grind to a halt later this year as energy companies meet their targets for upgrading inefficient households well ahead of the scheme's 2017 deadline.


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