Labour bites the bullet on energy: a new course?

 The UK Labour government has finally started to come to terms with how to deal with energy, but it hasn’t all always been pretty. Against strong green opposition, it has decided to press ahead with the Jackdaw fossil gas project, to ‘protect hundreds of jobs and help keep millions of homes warm this winter’ as Andy Burnham put it. Though the actual figures were not that impressive- it would only supply under 3% of overall UK gas needs and create 27 new jobs, although ‘safeguarding 273’.  But, when burnt, gas from Jackdaw could release between 23.6m and 35.8m tonnes of CO2 equivalent over its 11-year operational lifespan. Not good news for slowing climate change.  The Green Party called it climate vandalism. 

The fact that, although it wouldn’t help to reduce bills, Jackdaw would add to UK gas supplies (over 6% at peak) was however evidently a key issue and given that the Rosebank  oil project would not, and would just add to exports, it seems that it may not get a go ahead - though that is still to be finally decided. But perhaps it will be seen as a ‘fossil bridge too far’ – also adding 7 times more CO2 than Jackdaw. Even more of a worry. It was interesting then that, in parallel with the Jackdaw decision, the government also announced a new ‘energy wealth fund’, to be set up with a £2bn down-payment to ‘reinvest oil & gas revenues into the climate transition’. A concession to the greens… 

All this emerged just before the Budget was announced.  So did the news that Labour was to set up Great British Grid, a publicly owned body within GB Energy, to invest in electricity network infrastructure and work with existing network operators to accelerate grid upgrades. That went down quite well with some green energy interests -  grid improvements are vital for renewable expansion. However, it did raise the political issue of whether it would undermine GBE Energy’s original mission- which was to expand renewables, local projects in particular. 

And some other key energy issues still remained to be addressed - the most obvious being high power prices. The Tory and Reform opposition line seem to be that its all the fault of  the net zero policy and renewables, despite quite convincing rebuttals.  But it is true that the now closed Renewable Obligation (RO), which most projects are still benefitting from, has added a lot to prices. A rapid transition to CfDs is called for.

So what did we get in the budget?  I terms of of energy, although the main focus was on (welcome) short-term measures to reduce the impact of energy prices (like the £100 allowance), and the North sea oil and gas decision did get a mention, the RO and CfD issue did also feature quite strongly, with a separate consultation on Wholesale Contracts for Difference (WCfD) being announced. The Budget statement said the new consultation aims to ‘progress the government’s plans to delink electricity from volatile international gas prices,’ with ‘views on a possible hybrid model for generators accredited under the Renewables Obligation’ being sought.  

The proposal is quite complex. Existing low carbon electricity generators could be offered a WCfD, replacing variable wholesale market revenues from ROCs, with a fixed-price contract. Participation would be voluntary, and contracts would ‘only be awarded where they represent value for money for consumers’. And it would apply only to wholesale market revenues from ROC sales, existing RO support would remain. 

Interestingly though, non RO-backed legacy nuclear plants might also be eligible. The consultation document says, while the old nuclear assets ‘do not receive support under the RO, they remain substantially exposed to wholesale electricity prices. Bringing these assets within scope could contribute to the government's objective of reducing the link between gas prices and wholesale electricity prices’.

We are talking here about a few old AGRs and one PWR. Well maybe, while they are still around, we don’t want what they get from/charge to consumers being inflated by gas prices, or as the consultation document puts it, ‘the intention would be to provide wholesale revenue stabilisation rather than additional financial support beyond that’. But, as it notes, ‘legacy nuclear assets differ from most other generators as all eligible assets are owned by the same parent company, limiting the scope for effective competition through a standard auction process. In addition, we would want to encourage nuclear operators to continue to sell power in the forward market. As a result, government is considering whether a bespoke approach is required for legacy nuclear assets, such as direct award through bilateral negotiations, to ensure value for money for consumers and alignment with the scheme's objectives’. 

All a bit convoluted (as ever with things nuclear) and the overall WCfD may take time to sort, although the Budget statement says ‘further reforms to the CfD scheme will be delivered before the opening of Allocation Round 9,’ i.e late next year. Well maybe. We may also see some other changes and possibly sooner.  For example, the consultation says that the WCfD ‘would sit alongside the government’s commitment to relieve consumers from the RO scheme costs by covering 75% of its domestic costs via Exchequer funding for 3 years’. And it notes that the new British Industrial Competitiveness Scheme ‘will also exempt businesses from various levies, including the RO aiming to cut industrial electricity bills by up to 25%.’ The government is also to consult on the proposed implementation of a Fixed-Price Certificate system as a means of ensuring long-term stability and resilience of the RO as it matures. 

So there is a lot in train, with, overall, the Budget promising that ‘no new policy costs will be put on bills until a comprehensive Cost Control Framework is in place at the spending review in 2027, which will set budgets for components of energy costs, including policy costs’, with the government ‘prioritising a cheaper energy mix and procuring new generation only where it lowers bills, benefits the system, and can be accommodated by the grid’. 

Interestingly, there was no cut back in funding for heat pumps, as had been feared, but Carbon Capture Utilisation and Storage funding took a hit, with  £700m cut from the CCUS/hydrogen budget. CCS certainly had not got a good press of late.  More worryingly the Warm Homes programme also took a big £1bn hit and Carbon Brief thought it might end up being more - actually slowing down heat pump take up. But at least, meantime, gas standing charges are to be axed, a sensible short-term move. 

Next though, for the longer term, we await the outcome of the new renewable CfD auction round, AR8, due out soon. Depending on how it goes, that could be a game changer. The Budget statement said it ‘will lower bills, as well as deliver a good outcome for energy security and climate’, with the Chancellor insisting that ‘this government remains unshakably committed to net-zero by 2050’.  Well maybe - apart from its backtracking on energy saving and on gas, and in terms of cost and coherence, its increasingly odd Sizewell nuclear commitment…