Business Green – By James Murray – Energy Company Obligation and Renewable Heat Incentive to be reformed, as Chancellor declares ‘going green should not cost the Earth’
George Osborne has today announced the next wave of the government’s green energy policy reforms, unveiling plans to revamp key energy efficiency and renewable heat programmes in a bid to curb costs while still reducing carbon emissions.
Delivering his Autumn Spending Review, the Chancellor announced a host of new green policy measures, which he said were designed to back up the government’s belief that “going green should not cost the Earth”.
In a surprise move, Osborne announced the Energy Company Obligation (ECO) scheme will be replaced by a “cheaper domestic energy efficiency scheme” intended to save 24 million households an average of £30 a year on their energy bills. He also revealed the Renewable Heat Incentive (RHI) scheme will be reformed in a bid to reduce the cost of the subsidy programme by £700m.
In addition, he confirmed both the Department of Energy and Climate Change and the Department for Environment, Food and Rural Affairs (Defra) will face steep spending cuts, but stressed funding would increase for a host of green infrastructure projects, such as flood defences and rail electrification.
Treasury documents confirmed the ECO scheme, which sees energy firms fund energy efficiency upgrades for fuel poor and hard to treat households, would be replaced from April 2017. “The new scheme will upgrade the energy efficiency of over 200,000 homes per year, saving those homes up to £300 off their annual energy bill, tackling the root cause of fuel poverty and delivering on the government’s commitment to help one million more homes this parliament,” the Treasury stated.
It added that the new scheme would run for five years and have a value of £640m per year, rising with inflation.
However, energy efficiency campaigners have previously argued the government’s plan to improve one million homes during the parliament marks a 78 per cent reduction on the number of upgrades delivered during the previous parliament. The energy efficiency sector has also warned recently that jobs are being lost as a result of the surprise axing of the Green Deal financing scheme in the summer and a slowdown in the rate of ECO improvements.
The Energy Bill Revolution campaign, which is backed by a number of green businesses and has been leading calls for domestic energy efficiency to be made an infrastructure priority, said the budget for the new scheme represented a sharp reduction in the amount being spent on energy efficiency.
The group said annual spending through ECO had now fallen from £1.3bn to £800m in 2013 and would now fall again to under £650m.
“Despite pledging to re-build Britain, the Chancellor has failed to allocate any of the £100bn infrastructure fund to help re-build the 21 million British households with poor energy efficiency,” said Ed Matthew, director of the campaign, which is backed by 200 charities and businesses. “What is worse is that he has cut the existing and inadequate funding for energy efficiency under the ECO. This condemns millions to continue living in cold homes, damages our energy security and makes it all but impossible to meet future carbon budgets. It is short term thinking of the worst kind that will cost thousands of lives, lead to higher energy bills in the long term and increase pressure on the NHS.”
Shadow Energy and Climate Change Secretary Lisa Nandy also accused Osborne of effectively cutting funding for energy efficiency upgrades. “It’s extraordinary that the Chancellor has announced huge cuts to home insulation on the very same day we discovered that thousands of people died last winter because of the scandal of cold homes,” she said. “By slashing investment in energy efficiency yet again millions of families will be left paying more for their energy bills and people will suffer.”
Writing on Twitter, Richard Howard of think tank Policy Exchange noted the new scheme’s £640m a year budget was “well below the £1.2bn pa required to hit fuel poverty targets”.
The proposed changes come as the Committee on Climate Change prepares to publish its latest advice on the UK’s carbon budgets later this week. In recent updates the independent advisory body has warned the UK’s fourth carbon budget for the mid 2020s is at risk of being breached unless the government accelerated progress on a number of fronts, including improvements to domestic energy efficiency.
There was better news for the non-domestic energy efficiency sector, however, as the Treasury said it would provide £295m over five years to improve the energy efficiency of schools, hospitals and other public sector buildings. Moreover, around £300m of funding is to be made available for up to 200 heat networks that will generate enough heat to support the equivalent of over 400,000 homes and leverage up to £2bn of private capital investment.
However, uncertainty remains over the future of the RHI, after Osborne declared reforms would “save £700m”, while Treasury documents showed funding will increase to £1.15bn through to 2021, while reforms would “improve value for money” and deliver projected savings of almost £700m over the period.
“By the end of the Parliament the government expects to have incentivised enough additional renewable heat to warm the equivalent of over 500,000 homes,” it added.
The precise details of how the scheme will be reformed are yet to be disclosed and industry insiders remain fearful that without a more significant increase in funding the sector will struggle to meet its renewable energy targets.
Earlier this month, it emerged the UK was no longer on track to meet its legally binding goal of sourcing 20 per cent of its energy from renewables by 2020, largely because of slower than expected progress in deploying renewable heat technology. A leaked letter revealed Energy and Climate Change Secretary Amber Rudd had written to a number of cabinet ministers urging them to support calls for increased support for renewable heat.
In addition to the surprise announcements on the future of ECO and the RHI, Osborne confirmed a series of green policy and spending moves that had been widely anticipated.
He confirmed DECC would see its day-to-day resource budget fall by 22 per cent, but stressed spending on energy research would double, with a particular focus on small modular nuclear reactors, while support for low-carbon electricity and renewables is expected to more than double and tax revenues from the nascent shale gas industry would be diverted to a new Shale Wealth Fund.
And he highlighted the government’s commitment to protecting energy intensive industries from green policy costs, declaring that it would “permanently exempt our Energy Intensive Industries like steel and chemicals from the cost of environmental tariffs, so we keep their bills down, keep them competitive and keep them here”.
The Chancellor also announced energy generation would be excluded from venture capital tax breaks, in order “to ensure that they remain well targeted at higher risk companies”. A series of moves to limit energy projects access to tax breaks has been slammed by community energy groups, which have argued that the changes make it harder to raise funds for small to medium scale renewable energy projects. A number of community energy groups this week revealed they were considering legal action over the limited notice the government provided ahead of the changes.
Separately, Osborne underlined the government’s support for next week’s Paris Climate Summit. “We support the international efforts to tackle climate change, and to show our commitment to the Paris talks next week, we are increasing our support for climate finance by 50 per cent over the next five years,” he said.
And he again stressed that infrastructure investment remained a priority, detailing plans for new spending on new roads, rail electrification and flood defences. “Defra’s day-to-day budget falls by 15 per cent in this Spending Review, but we’re committing over £2bn to protect 300,000 homes from flooding,” he said.
Finally, Osborne declared the government would continue to support the development of Ultra Low Emission Vehicles, and would respond to the recent emissions scandal by delaying the removal of a diesel supplement on company cars that imposes an additional charge on diesel cars until 2021.
Green Party MP Caroline Lucas said the Chancellor had failed to respond to “the biggest challenge of our time”.
“The CSR should have been climate-proofed, with all spending commitments assessed as to whether they help cut carbon emissions – but instead we’ve seen the gutting of both the Department for Energy and Climate Change and the Department for the Environment,” she said. “The Chancellor announced the largest road building programme since the 1970s and new support for nuclear power and fracking, all at a time when we should be redoubling our efforts on public transport and renewables.”
However, Josh Fothergill, policy and practice lead at the Institute of Environmental Management and Assessment, said the Spending Review’s focus on security and attempts to integrate issues such as health and social care, devolution and infrastructure underlined the importance of sustainability.
“Ring-fencing spend on flood resilience, an enhanced focus on apprenticeships and skills, new energy research schemes and making investments in transport infrastructure on a scale not seen since the 1970s are all positive moves,” he said. “There are, however, over 15 per cent cuts made to Defra, DECC and BIS’s day-to-day spending, so the question our members would ask is ‘is there realistically enough resource to deliver a sustainable future?’. If the government is aiming to rebuild Britain, it needs to be aligned to long-term sustainability trends beyond just the economy or single-term parliaments.”