October 30, 2017

Cost of Energy: What Might the Helm Review Mean for UK Clean Growth?

The 242-page independent review headed by Professor Dieter Helm pulls few punches on the UK's existing energy policy landscape - but will the government listen?

Arguments have raged for years now about rising energy bills for households and businesses, leading first 'Red' Ed Miliband and then 'Strong and Stable' Theresa May to push for a price cap on consumer bills.

But while the usual suspects argued that decarbonisation policies have pushed up the costs of energy, renewables advocates conversely claim not enough faith and focus has been placed in delivering bill-cutting clean power and efficiency amid the changing energy landscape.

Yesterday's independent Costs of Energy Review - which fulfils a Conservative Party manifesto commitment from the recent General Election - was therefore intended at trying to settle, or at least somewhat advance, the debate.

The document takes a very pro-market view, and calls for the government to "radically simplify" the energy system by significantly reducing regulation and state intervention. It broadly makes two headline points: One, that the cost of energy is currently higher than it needs to be to meet government objectives and to be consistent with the Climate Change Act; and two, that energy policy, regulation and market design "are not fit for the purposes of the emerging low carbon energy market, as it undergoes profound technical change".

However, it has appeared just less than two weeks after the government's long-awaited Clean Growth Strategy, and coming in at a whopping 242 pages filled with numerous recommendations and fierce criticism of government policies, complex energy regulations and even the Committee on Climate Change, has the government bitten off more than it can chew?

After all, hamstrung by a barely existent majority, calamitous Brexit negotiations and existing commitments to cap energy bills, it seems unlikely Theresa May will end up taking on board everything in the document.

As Dustin Benton, policy director at think tank Green Alliance pointed out, by setting out 67 separate recommendations "it is so broad that the worry is that the government will cherry pick the bits it prefers".

Professor Dieter Helm was a controversial choice to lead the review to start with, known for harbouring views more favourable towards new gas capacity than renewables and clean power subsidies. And, given just three months to put together the review, the Oxford academic has produced something few people seem to be surprised by, given views he has espoused in the various books he has previously written on the UK's energy market. Helm himself, though, did not respond to BusinessGreen's request for comment for this piece.

"It is a bit of a curious egg," E3G chairman Tom Burke tells BusinessGreen. "Again, as you would expect, it is an assembly of his thinking, without much challenge or debate. So it's not at all clear what this adds to the debate, other than the fact that the government now thinks all of us should know what Dieter thinks."

Yet, despite Burke's reservations, he is in fact in agreement with many of the problems with the current energy system that the document highlights. He does, for example, agree there is a need to establish a new independent energy systems operator to look after the architecture of the energy system as it undergoes huge changes as a result of decentralisation, decarbonisation, and increased use of battery storage and demand response technologies.

"A lot of his diagnosis is right," Burke concedes, highlighting in particular two areas of agreement with the Oxford academic. "He is right about the way in which DECC and the Climate Change Committee (CCC) just applied conventional forecasting methods to an unconventional system and got the wrong answer, so they wildly overestimated the growth of energy demand."

Moreover, Burke agrees with Helm's view the government has made regulatory mistakes through its Electricity Market Reform (EMR) policies, which have resulted in the government determining the level and mix of generation, with investment decisions now "effectively quasi-renationalised". Burke argues the government's decision to back Hinkley Point C via a long-term set price deal is a direct result of these EMR policies, which would push up energy prices in the long-run.

"The government did something that was really quite extraordinary," says Burke. "The Conservative government created what is in effect a state purchasing agency for electricity. So while preaching the doctrine of policy not picking winners, it went out and tried to pick winners, and the result was Hinkley and nuclear."

But, Burke is more sceptical about some of the solutions put forward by Helm, which he argues are a little less clear. "It's one thing to say the patient's ill, it's another thing to say 'here's the remedy'," he says.

And indeed, two of Helm's major remedies for the energy market and decarbonisation came in for criticism from energy industry experts and green groups.

Firstly, Helm proposes setting an economy-wide carbon price as "the most efficient way to meet the Climate Change Act target and carbon budget", as well as a border carbon price "to address the consequences of the UK adopting a unilateral carbon production target".

And another major proposal as regards to the renewables industry is Helm's call for Feed-in-Tariffs (FiTs) and other low carbon Contracts for Difference (CfD) auctions to be gradually phased out and merged into a new "unified equivalent form power (EFP) capacity auction" in order to push the costs of intermittency onto "those who cause them".

But while Sam Hall, senior research fellow at Bright Blue, was also quick to praise Review's highlighting of the myriad problems faced by the energy industry, he was sharply critical of these two proposals.

"An economy-wide carbon price would effectively internalise the social and environmental costs of carbon emissions, but is a volatile and uncertain price signal for investors, subject to short-term political and economic forces, that would struggle on its own to drive the required investment," said Hall. 

"The proposal for equivalent firm power capacity auctions, where generators are responsible for their own balancing, risks creating inefficiencies and added costs for consumers. Instead, the grid should continue to be balanced at the system level rather than for individual projects, in order to optimise the use of all existing generation and storage assets."

The official line from government is that BEIS will be "carefully considering" the Review's findings over the coming weeks. But the practical implications of taking on board its headline proposals may be tricky. 

Helm's call for phasing out CfD auctions seems particularly unlikely to gain traction, given the government only announced two weeks' ago that another CfD auction for 'less-established renewables technologies' would take place in spring 2019.

Meanwhile, it would be extremely politically difficult for the government to implement an economy-wide carbon price, as Cornwall Insight associate Peter Atherton notes. 

"Economists have been calling for such a measure since the 1990s, but it has not been implemented successfully and comprehensively anywhere in the world," Atherton said in a statement yesterday. "The question therefore is, if such a measure can't be implemented, what would happen to the rest of the reforms?"

Ahead of the publication of the Review yesterday there were many fears among renewables advocates the document might seek to undermine the Clean Growth Strategy, which seems to have been broadly welcomed by the green economy. Yet, aside from contradictions over views on CfD auctions and some other Helm proposals, the two documents are in fact broadly in alignment in a number of key areas.

For example, like the Clean Growth Strategy, Helm emphasises the importance of boosting energy efficiency, smart technologies and the role of Carbon Capture Utilisation and Storage (CCUS). Helm also concedes the cost of renewable energy has fallen significantly and will continue to do so. And, his overall view is that the energy system is transitioning rapidly towards one which is characterised by renewables, decentralisation, battery storage, demand side response and interconnection - and that the current policy and regulatory landscape will need to quickly evolve to support this transition. It is an assessment few in industry and Whitehall would now argue with.

"Professor Helm's report supports the view that renewables are set to become the backbone of the UK's modern power system and that a flexible grid will ensure costs for consumers are kept as low as possible," RenewableUK's chief executive Hugh McNeal, said in a statement yesterday. 

"He specifically says wind energy can make contribution to security of supply and describes renewables as the 'new conventionals'."

So despite many initial fears, renewables advocates may well cautiously welcome much of Helm's prognosis, while disagreeing with large chunks of his treatment plan.

So in all, it is perhaps hard to know what to make of the Helm Review. It highlights a number of issues with the UK's overly complex and highly regulated energy market that most would agree with, it concedes - albeit through something like gritted teeth - that renewables costs have come down and stresses the importance of supporting further innovation as the system decarbonises. Yet few of its actual proposals for change seem to have found support among industry and policy wonks alike. 

All of which begs the question: what lasting impression will it leave on the shape of UK energy? After all, considering the predictable anti-renewables stance taken by certain sections of the press in reaction to yesterday's publication, it certainly doesn't seem to have quelled the wider argument over rising energy bills.

But as the Solar Trade Association's head of policy Chris Hewitt  argues, while there are "plenty of contradictions" in the Review and he does not agree with all the answers put forward, it is importantly "asking the big, strategic questions that need to be asked today, given massive technology change".

"We hope this Review will prompt an urgent rethink and without further prolonging uncertainty for our industry," said Hewitt, in a line that perhaps sums up the views and of many in the green economy.

So, in broadly aligning with the Clean Growth Strategy and raising key questions about the future of the UK energy system, the Review may well still play a key role in helping shape the low carbon future, even if the government's choice of route to get there is unlikely to be quite the one Professor Helm would himself have chosen.

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